U.S. equity markets plunged sharply lower on Tuesday as investors liquidated stocks from the get go, triggered by negative sentiment out of Asia and Europe. Besides the outlook for a weaker U.S. economy, global investors reacted to reports that growth in China was slowing. The Leading Economic Index for China rose 0.3% in April. This was less than the 1.7% reported June 15th.
Coupled with the fear that China's growth is not likely to accelerate and should grow moderately at best, are early trader reaction to the call for a decline in U.S. jobs on Friday, and speculation regarding the results of the European bank stress tests. The combination of all of these factors has created fear and this fear is expected to pressure equities while driving up Treasury Bonds and Treasury Notes.
A greater than expected drop in U.S. consumer confidence also weighed on investor risk sentiment. The Obama administration with its Keynesian view of the economy needs the consumer to start spending. The loss of job security and the constant weakness in home values is putting fear into the consumer who is choosing to sit in cash or postpone his spending until the economy becomes more stable.
Businesses are also feeling the pinch because of the lack of consumer spending and may have stopped hiring. Today, the first of three employment reports will be released at 7:15 CT. This report is the ADP Employment Report. On Thursday, investors will get a chance to react to the Weekly Initial Claims Report. On Friday, the government will release the most important U.S. Non-Farm Payrolls Report and Unemployment Rate.
In order to get a grasp of the markets on Wednesday it is important to study the pre-report guesses for the ADP Employment Report The consensus estimate has payrolls growing by 60,000. This number is about the middle of the 23,000 to 100,000 range of guesses. Simple stated, a low number will be bearish and a high number will be bullish.
With stock indices sitting on their lows for the year, the large spread in the ADP guesses defines the risk that an investor has to take. Guess wrong ahead of the report on a high number and the markets will plunge through a double-bottom formation. Guess wrong on the low side and fresh buying and short-covering will destroy the bears.
It is important that the trader comes into today armed with the knowledge of how the markets will react to the release of the number. Watch for knee-jerk reactions and sudden shifts in direction if the report straddles the consensus. If this is the case then don't expect an acceleration in either direction, but instead look for volatility.
It's hard to tell at this time how much of this report is already priced into the market. Based on the trading action this week, it is clear that investors don't seem to like the uncertainty the ADP report is generating. This could be the reason why investors are trying to take risk out of the equation ahead of the report.
Another difficulty that could arise from the report will be triggered by an already sharply lower market. If Asia and Europe decide to sell the market ahead of the ADP Report then U.S. investors could be looking at a sharply lower opening even before the number comes out. If this is the case, then traders should exhibit strong caution because after all, no one wants to sell into a bear trap.
Treasury Bonds and Treasury Notes must continue to be monitored as their yields are really the measure of the economy rather than stock averages. If yields continue to plummet then the outlook for the economy will remain grim. This should encourage flight to safety buying in the Dollar and Treasuries and the shedding of risky commodities and equities.