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US stocks start June on the wrong foot despite strong manufacturing data

Last updated: 16:21 01 Jun 2022 EDT, First published: 06:30 01 Jun 2022 EDT

Wall Street stock chart

4:20: Volatility appears to be here to stay

The Dow slid 177 points, 0.5%, to 32,813, the Nasdaq declined 87 points, 0.7%, to 11,994 and the S&P 500 lost 31 points, 0.8%, to 4,101.

It was another volatile trading session after an afternoon rally improved what could've been a much worse day for the benchmarks. 

“We probably see volatility for the first half of June, and maybe a decent portion of June, because we’re not going to have any new information that calms us down before then,” SoFi’s head of investment strategy Liz Young said on CNBC’s “Halftime Report.”

12.05pm: Wall Street goes south

After a promising start to June trading, US stocks had reversed sharply by noon despite new economic data showing the country's manufacturing sector grew in May. 

At midday, the Dow had slipped 393 points to 32,598 points.

The S&P 500 had dipped 54 points at 4,078 points and the Nasdaq had sunk 154 points at 11,928 points.

City Index and FOREX.com market analyst Fawad Razaqzada said today’s quick reversal was a reminder that investors were still in a bear market and that they continued to face significant risks with inflation yet to show signs of easing in a meaningful way.  

“Unlike before, equity investors will not have the support of the Fed to prop up the stock markets. That’s why this general downward trajectory in stock prices has lasted longer than most of the previous episodes,” Razaqzada said.

“I expect this trend to continue now that the Fed has started to shrink its balance sheet by $95 billion or so every month for the foreseeable future. This means that any piece of good news will likely be treated as bad news for stocks since the Fed’s moves will be data-driven.”

Meanwhile, the US Institute for Supply Management (ISM) purchasing managers' index (PMI) for May came in higher than expected at 56.1 compared to 55.4 in April. Analysts had been expecting a PMI of 54.5, according to the ISM.

The figures showed that new orders production and backlogs were growing at faster rates, with prices increasing at a slower rate and employment contracting.

ISM chair Timothy Fiore said the US manufacturing sector remains in a demand-driven, supply chain-constrained environment.

“Manufacturing performed well for the 24th straight month, with demand registering faster month-over-month growth and consumption softening due to labor force constraints,” Fiore said.

“May was a second straight month of slight easing of prices expansion, but instability in global energy markets continues.”

ING chief international economist James Knightley noted that the ISM tends to follow the China PMI’s lead, but the country’s aggressive COVID containment strategy meant there was likely to be less downside in the ISM.

“We had thought the weak Chinese numbers and mixed regional indices had pointed to the prospect of a dip, but instead, new orders rose nicely to 55.1 from 53.5 and production was up at 54.2 from 53.6,” he said.

“Moreover, with China now showing signs of partially relaxing its latest lockdowns there is hope that the China numbers can show some modest improvement and relieve some of the supply chain stresses for US manufacturers.”  

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9:40am: Stocks rise ahead of key economic data

US stocks rose at the open on Wednesday as investors kick off a new month of trading.  

Just after the open, the Dow had added 183 points at 33,174 points.

The S&P 500 was up 27 points at 4,160 points and the Nasdaq had gained 133 points at 12,215 points.

Shares of the software company Salesforce were up about 13% after the company raised its profit forecast in its latest earnings report.

Biotechnology company Tonix Pharmaceuticals (NASDAQ:TNXP) Inc had surged about 46% following the announcement the company’s board had approved a share repurchase program to buy back $12.5 million worth of outstanding common stock.

6.30am: Volatile trading predicted

US markets were expected to open mixed on Wednesday with trading likely to be choppy ahead of key economic data.

US manufacturing sector PMIs are due today while Friday brings the always key non-farm payrolls figure. Both sets of data will show how the US economy is faring amid elevated levels of inflation and rising interest rates.

Futures for the Dow Jones Industrial Average rose 0.4% in pre-market trading, while those for the broader S&P 500 index gained 0.1%, but contracts for the Nasdaq-100 shed 0.1%.

“US and European futures are trading higher while traders are going to keep a close eye on the Manufacturing PMI readings that will be released from the Eurozone and the US,” said Naeem Aslam, chief market analyst at avatrade.com.

The US manufacturing sector is expected to show continued growth in May but at a slightly easier pace than in the previous month. 

“Today is also the first day of June which means today is the first day that we will see the Fed in the US begin the process of reducing the size of its balance sheet. It is highly possible that most traders may sit on the sideline today as they would like to see the reaction of this activity and how market players react to this monetary policy decision,” added Aslam.

The US Federal Reserve is expected to continue raising interest rates by 50 basis points and investors fear that higher interest rates will crimp economic growth and hit corporate bottom lines.

“The current quarterly earning period is almost coming to end, and the message that we have heard from companies is that they are preparing themselves for higher cost, and for an environment where consumers may not want to dig deep into their pockets,” said Aslam.

In energy markets, WTI crude oil futures rose 1.65% to $116.56 a barrel and Brent crude futures added 1.70% to $117.56. Oil prices continue to be well supported in the wake of news of the EU's sanctions on Russia's oil exports.

"Supply is a major concern and the fact that the EU is prepared to move away from Russian oil, traders are concerned how the supply and demand equation will come to a level under which we could see oil prices back below the $100 price level. For now, it is very much clear that oil prices are likely to remain high for an extended period as OPEC is in no mood to pump extra oil supply," noted Aslam.

Contact the author at jon.hopkins@proactiveinvestors.com

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