U.S. Stock Market Plunge Puts Market Fate in ADP Report
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 Chinaâ€™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 donâ€™t expect an acceleration in either direction, but
instead look for volatility.
Itâ€™s hard to tell at this time how much of this report is already price into
the market. Based on the trading action this week, it is clear that investors
donâ€™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
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.
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