A diverse mix of events on the fundamental side may have nudged the market significantly to trigger technical selling that seems to have gotten out of hand but is within the 38% retracement level.
China’s bad PMI number for an 8th month in the row makes many wonder why are authorities on the sidelines with the stimulus and that inertness is raising suspicions that perhaps something more sinister, under the hood, is enveloping China. Talk about stimulating consumer demand, although a good long term policy to diversify the economy away from its export dependence, is not the short term fix market watchers seem to desire.
Another foreign event was also exerting its dominance over US equities – European PMIs. With austerity not working, monetary policy constrained to sterilization operations and an unaffordable fiscal stimulus EU looks to many as a sinking ship capable of only talking about how they must not sink.
Put together, China and EU problems spilled over into commodities and oil taking out stops or creating margin calls which had to be covered by selling shares.
Strength in the dollar and Bernanke’s delay to announce QE3 also may have compounded commodity troubles.
Some other events constraining liquidity and availability of funds were also at play today:
- Margins we raised yesterday on traders in Spanish debt
- Margins were raised today on traders in Italian debt
- Cash was sidelined awaiting Moody’s downgrade of banks
Adding to the oddness of the day is the fuming by the BRICS who are threatening to establish their own version of an IMF that will serve their crisis purposes while others are fuming at the way GDP is calculated arguing that it must be ditched in order to incorporate depleting resources.
On the bright side, the big sell-off in oil and other commods is a good thing not just on the inflation front (good justification of a QE) but also for all of us who are using them for various other productive endeavors while… while the positive reaction in bank names after Moody’s downgrade sheds some hope on the sector that needs to rally if the stocks are to go higher.
Now that a set of negatives has been spilled, as usual, it is up to the authorities to respond to them.