Stocks Shrug Off Weak PMI Data, Oil Selloff

U.S. equity markets pared losses Monday on the heels of comments from a key Fed official, shrugging off disappointing manufacturing data around the world and a renewed tumble in oil prices.

The Dow Jones Industrial Average was 18 points lower, or 0.11% to 16448. The S&P 500 shed 1 point, or 0.05% to 1939, while the Nasdaq Composite gained 6 points, or 0.14% to 4620.

Utilities and telecom were the sessions biggest sector gainers, while energy and financials declined the most.

Today’s Markets

Wall Street pared early losses as traders parsed factory data from around the world, and reacted to a fresh drop in global oil prices.

The move higher came on the heels of comments from Federal Reserve Vice Chairman Stanley Fischer, the first member to speak publicly since last week’s FOMC meeting, who said it’s “difficult” for the central bank to “judge the likely implications of this [market] volatility.” He continued by saying if the markets continue to contract, it could signal a slowing global economy that would hit growth and inflation in the U.S.

He added that he can’t guess at action the Fed might take at its March meeting because they “simply do not know.”

Earlier in the session, U.S. investors digested still-weak factory data from the Institute for Supply Management, which showed the manufacturing gauge ticked up to 48.2 last month from 48 in December, a reading that was slightly higher than expectations for 48.1. However, the gauge was still rooted in negative territory, coming in below the 50 mark that separates expansion from contraction.

The new orders index, meanwhile, came in at 51.5 for the same month, coming out of contraction in December. It was the highest level since August. The manufacturing employment index, though, notched its lowest level since June 2009.

Martin Jarzebowski, co-portfolio manager of the Small Cap Value investment portfolio at Federated Clover, said in context, the employment component of the ISM report shouldn’t be too concerning for those keeping tabs on the U.S. economy.

“The payroll data for the U.S. has likely peaked, and that is to be expected when the economy approaches full employment levels,” he explained. “When you look at the consumer and services side, that is very healthy… [the U.S.] has decent data on labor and consumer confidence is rising, and that means the consumer will start to benefit in 2016.”

The U.S. data came on the heels of overnight figures from China, which showed the nation’s manufacturing sector slipped further into contraction territory. The factory-activity gauge fell for the sixth-straight month to a three-year low of 49.4 last month, compared to expectations for 49.6. The figures came after a read on China’s services sector in January, which showed expansion, but at a slower pace than in December.

Shortly after, Markit’s eurozone purchasing managers’ index also showed a drop in the gauge during January. The reading came in at 52.3 from 53.2 in December, but still above the 50 mark separating expansion from contraction. The data also showed new orders and new export businesses eased during the month.

The global data sparked a selloff across both Asian and European equity markets. China’s Shanghai Composite index closed down more than 1%, while the Euro Stoxx 50, which tracks large-cap companies shed 1.34%. The German Dax, French CAC 40, and UK FTSE 100 were all lower by more than 1%. In recent action.

“The release of yet another disappointing Chinese manufacturing PMI reading should have come as no surprise to many, with five of the last six sub-50 readings coming below market estimates,” IG market analyst Josh Mahony, said in a note. “From an industrial perspective, there are precious few indicators that point to a recovery within China and this continues to spell bad news for the global economy.”

Meanwhile, traders in the U.S. prepared to parse data on their own manufacturing economy at 10:00 a.m. Economists expected the Institute for Supply Management’s PMI gauge  to have fallen to 48 in January from a December reading of 48.2. It would be the third-straight month of contraction for the U.S. manufacturing sector.

Data on the U.S. service sector, which saw a slower rate of growth in December from November, but remained in expansion territory, was slated for release on Wednesday morning. The December reading came in at 55.3.

Elsewhere in the market, traders kept a close eye on significant selling pressure in global oil prices, reversing a reprieve seen on Friday that allowed for a 1% rally, as hopes faded for a production cut by the world’s biggest producers.

In recent action, West Texas Intermediate crude prices dropped 5.95% to $31.62 a barrel, while Brent, the international benchmark, shed 4.86% to $34.24 a barrel.

The move came on the back of the weak manufacturing data in China adding to demand worries from the world’s second biggest economy. Also weighing on sentiment was a report in a Saudi Arabian newspaper, according to Reuters, of a senior OPEC member who said it was too early to talk about an emergency meeting on production levels.

That comes after a jump in prices last week after Russian energy officials said they had proposals from Saudi Arabia on how to manage output and were ready to talk about how to level production.

“With China, we have crisis in credibility and oversupply which is an overhang on the industrial complex, which then provides a negative feedback loop into commodities struggling to digest oversupply and looking for improvements in global growth to improve demand,” Jarzebowski said.

He said ultimately what will help oil prices stabilize is some kind of clearing event in the commodities complex to level out the market.

“That would be a bankruptcy from an energy company where some over-levered, marginal players go under, and supply starts to be reined in, which would be very healthy and a sign that we’re nearing a bottom,” he explained.

Amid the uncertainty, traders flocked to safe-haven assets. The yield on the benchmark U.S. Treasury bond rose 0.026 percentage point to 1.956%. Gold prices bounced 1.03% to $1,127 a troy ounce, while silver gained 0.70% to $14.33 an ounce. Copper slid 0.61% to $2.05 a pound on the heels of the China factory data.