Relief rally short lived as economic data weighs

The relief rally, triggered by an agreement between US Democrats and Republicans to raise the debt ceiling, was short lived today with traders proving extremely quick to cash in their gains after US ISM data badly disappointed the markets in the afternoon session, posing more questions about the strength of the US economic recovery.

US data reverses early relief rally
US ISM manufacturing data badly disappointed an already fragile market, coming in below market consensus of 54.9 to post a figure of 50.9, with new orders effectively contracting. This data reinforces the concern that US economic activity is slowing and poses serious questions as to what to expect for US GDP.

It seems that European equities have been quick to track US equities lower today despite the solid in roads made in the morning session that saw the FTSE 100, DAX and CAC all higher by more than 1%. The fragility of sentiment, particularly in the face of slowing economic data in the US, is keeping investor tensions high, along with the fact that despite Sunday night’s deal to raise the debt ceiling, the US may still see a credit ratings downgrade by one or more of the ratings agencies.

The aspect to take from today’s markets is that whilst the debt deal is welcomed by investors, there remain huge concerns about the stability of the country’s credit rating and the slowing pace of economic activity. We have US non-farm payrolls due out on Friday this week and with last month’s shockingly bad report still fresh in investors’ minds, traders are likely to remain rather jumpy this week.

We are getting so many bad spots in US economic data that sooner or later investors are just going to line up the dots and realise that they are all pointing down.

There has been a swift change from ‘risk on’ mode in the morning session back to ‘risk off’ in the afternoon. The morning session saw strong rallies in the prices of key miners and banks, whilst once the US markets opened, these two sectors were quickly sold off, with the banks reversing to flat territory and the miners becoming the key drag on the UK trading session. The FTSE 100 lost 120 points in the first 30 minutes of trading after the US markets opened, giving a strong indication that European traders remain transfixed on developments in the US despite the debt deal on Sunday night.

The price of gold, which had fallen to around $1610 in early trading on profit-taking after the US debt deal was announced, immediately charged higher after the ISM manufacturing data was released, threatening to break to new record highs above $1630.