China Crumbles – Markets in Turmoil

As reported this morning by TBWS Group, the world’s second largest economy; China’s official manufacturing purchasing managers index for August fell to 49.7, from 50.0 in July, marking its lowest level since August 2012. A number below 50.0, just like our ISM index, implies a contraction. Also the Caixin manufacturing purchasing managers index, a gauge of nationwide manufacturing activity, fell to more than a six-year low in August, according to Caixin Media Co. and research firm Markit.

Every attempt being made by Chinese officials appears to have failed, de-valuing its currency, buying stocks and lowering interest rates paid to banks that are parking money in the central bank of China. Nothing is helping, although China’s growth at about 7.0%, it is half of what it had been. The China effect spread to other Asian markets and emerging markets and is infecting Europe and the US economic growth forecasts. The reaction to China’s data this morning had the US DJIA futures at 8:00 am down 400 points. At 8:00 am MBS price +22 bps from yesterday’s close and the 10 yr note yield at 2.16% -5 bps from yesterday’s close.

Here in the U.S. more bad news hit the markets this morning with August ISM manufacturing index expected at 52.8 from 52.7 in July, the index declined to 51.1 the weakest since May 2013. The New Orders Index registered 51.7 percent, a decrease of 4.8 percentage points from the reading of 56.5 percent in July. The Production Index registered 53.6 percent, 2.4 percentage points below the July reading of 56 percent. The Employment Index registered 51.2 percent, 1.5 percentage points below the July reading of 52.7 percent. Inventories of raw materials registered 48.5 percent, a decrease of 1 percentage point from the July reading of 49.5 percent. The Prices Index registered 39 percent, down 5 percentage points from the July reading of 44 percent, indicating lower raw materials prices for the 10th consecutive month. The New Export Orders Index registered 46.5 percent, down 1.5 percentage points from the July reading of 48 percent.

Comments from the panel reflect a mix of modest to strong growth depending upon the specific industry, the positive impact of lower raw materials prices, but also a continuing concern over export growth. Overall a very weak report and to top it all the July construction spending expected to have increased 0.8% was up 0.7%, June spending was revised from +0.1% to +0.7%.

As I reported on August 20th & 21st the confusion by the FED over the next course of action as to increase or not to increase interest rates will only exacerbate the situation. I did indicate then that it seems the equities market has seen the top with Dow Jones support around 15000. Now if the previous low set last week falters on any test then 14500 is the next level of support with major support below around 12000 to 12500.

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