Will Weak European PMI Data Trigger Steep Stock Market Decline?

There is risk in the air as we start the new year. We can see the weakness in the equity markets, but behind the scenes, investors are flocking into the safe-haven U.S. Treasurys and Japanese Yen. Gold is even catching a bid.

Japan is on bank holiday when means lower volume. Furthermore, we may not see a return to normal volume levels in Europe or the U.S. until next Monday. Liquidity could be an issue today which means we could see another round of exaggerated price action.

At 0626 GMT, the benchmark March E-mini S&P 500 Index is trading 2483.50, down 21.75 or -0.87%.

March 10-year U.S. Treasury Notes are at 112’02, up 0’01.5 or +0.04% and March 30-year U.S. Treasury Bonds are at 146’06 or up 0’06 or +0.13%. Treasurys move inverse to interest rates which means rates are falling.

The USD/JPY is at 109.170, down 0.545 or -0.49%. It is trading on the weak side of the June 18, 2018 bottom at 109.179. The daily chart indicates this is a potential trigger point for an acceleration to the downside with the May 29, 2018 bottom at 108.114 the next major downside target.

February Comex gold is trading $1288.60, up $7.30 or 0.58%. This is higher than last week’s high and on the bullish side of a major retracement level at $1285.70. If support can be established at this price then this could create the momentum needed to generate a surge to the upside. The daily chart indicates there is room to run since the next major upside target is a technical level at $1312.30.

What Will Be the Catalyst?

In my opinion, the fate of the stock market today will be determined by the European PMI data.

The contraction in China’s PMI may have lit the fuse given today’s early session weakness. Further selling pressure is expected if Europe misses their marks.

At 0815 GMT, Spain will release its Manufacturing PMI report. It is expected to come in at 52.4. At 0845 GMT, Italian Manufacturing PMI is forecast at 48.5. At 850 GMT, French Final Manufacturing PMI is estimated at 49.7 and at 0855 GMT, German Final Manufacturing PMI is forecast unchanged at 51.5.

Euro Zone Final Manufacturing PMI is forecast at 51.4.

With European PMI figures in contraction or hovering near the 50.0 level, the global equity markets are in a position to break sharply if the remaining positive PMI reports fall below this key level.

In the U.S. earlier this month, HIS Markit said its U.S. composite output index fell to a 19-month low for December. They also said services and manufacturing PMIs dropped to their lowest levels in about a year.

Earlier today, the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI), fell to 49.7 form 50.2 in November, its first contraction since May 2017.

With stocks already under pressure and investors looking for protection, the groundwork may have been laid for further downside pressure. So be prepared for the selling to accelerate and volatility to surge if the European PMI data comes in weaker-than-expected.