Disappointing employment data out of the US brought major selling pressure to equity markets and the Dow Jones Industrial Average is now trading back in negative territory for the year after seeing a strong rally in the early part of 2012. The volatility was created by the Non Farm Payrolls report, which showed the fewest monthly jobs additions so far in 2012 and the unemployment rate was also on the rise. This is being accompanied by the fact that manufacturing reports in the US, China and Europe are all suggestive of slowing momentum in productivity and, as a result, risk aversion returned to markets in full force. The S&P 500 is now trading back below the key 1300 level at 1285 while the Dow dropped nearly 2 percent, giving it a total yearly performance of -0.4 percent for 2012.
Looking at the details of the Non Farm Payrolls release, we can see that 69,000 jobs were created in the US during the month of May, which was slower than even the weakest consensus forecasts. The unemployment rose to 8.2 percent while the ISM manufacturing report showed that productivity dropped to 53.5, after seeing its highest levels in nearly a year during the month of April. This was matched by similar reports out of Europe and China, where the numbers showed long term lows. Manufacturing in Europe is now progressing at its slowest pace since 2009 while the Chinese PMI showed that manufacturing is at its weakest levels since the end of last year.
Looking at the broader market performance for this month, the S&P has now posted declines of 6.3 percent, which is the second consecutive monthly drop and now brings the price to earnings ratio in the index to below 13 for the previous year. The latest move is significant because this is well below the 50 year average for the S&P (which stands at 16.4), despite the fact that corporate earnings releases for the S&P are expected to reach nearly $105 per share this year (an all time high). Overall, this suggests that the latest push lower might be an excellent opportunity for long term investors with conservative positions.
Shorter term, however, there is still more downside risk as most of the economic data this week did point to a downside surprise in today’s jobs figures. As we look to start next week, Asia is likely to build on the selling momentum seen today, as investors get their opportunity to react to today’s employment data but the question at this point will be the degree to which prices can continue to fall without any upside corrections. Risk to reward favors long term buys at these levels.
The USD/CHF has now broken some very critical long term resistance levels and prices are now en route for a test of the 61.8% Fibonacci resistance that is now seen at 0.9910. This is also where the 200 week moving average resides, so prices are unlikely to break through here with ease on the first test. An upside break will turn the 2012 bias squarely to the upside, however, and bring prices well above parity.
The S&P 500 is slowing making its way through Fibonacci support now seen at 1280. It is looking like we will see a daily close below here, which is suggestive of additional losses next week. Major support is not seen until the low 1200s, so expect any rallies to be sold.