Market Commentary: U.S. manufacturing activity hits three-year high

US

Positive data on US manufacturing was not enough to stimulate the market as U.S. stocks retreated, after the Standard & Poor’s 500 Index had its best month since February. The drop in markets was spearheaded by declines in the energy sector.

Five of the 10 main S&P 500 groups retreated, Newfield Exploration Co. slid 2.1 percent as energy companies dropped 1.3 percent as a group, as the price of West Texas Intermediate crude slumped. Chevron Corp. lost 1.5 percent.

Delta Air Lines Inc. and Southwest Airlines Co. rallied at least 2.8 percent to lead carriers higher. Home Depot Inc. dropped 2 percent after saying it was investigating a possible data breach. Staples Inc. jumped 8.1 percent after Credit Suisse Group AG raised its rating on the stock.

The Nasdaq 100 Index rose 0.3 percent to a 14-year high as Regeneron Pharmaceuticals Inc., Staples and Tesla Motors Inc. rallied.

Regeneron reached an all-time high gaining 2.6 percent to $359.50. The cholesterol drug that the company is developing with Sanofi cut levels of heart disease-causing fat in four studies, according to results released over the weekend.

US Manufacturing

U.S. manufacturing activity hit a nearly 3-1/2-year high in August and construction spending rebounded strongly in July, signs the economy entered the third quarter on strong footing.

Yesterday's upbeat data added to reports on employment and housing that have suggested growth remains strong, despite a slowdown in consumer spending in recent months. 

The Institute for Supply Management (ISM) said its index of national factory activity rose to 59.0 last month, the highest reading since March 2011, from 57.1 in July.

A reading above 50 indicates expansion in the manufacturing sector. Economists had expected a pullback to 56.8 however August's reading was lifted by a surge of new orders. Order backlogs and new export orders also rose.

U.S. manufacturers fared better in August than factories in Europe and Asia, which have been hit harder by escalating tensions in Ukraine and a patchy recovery in China.

Manufacturers were mostly upbeat in August, with business conditions considered promising. Furniture manufacturers said labour was becoming an issue.

The bullish manufacturing picture was corroborated by another factory survey. Financial data firm Markit said its U.S. manufacturing Purchasing Managers Index rose to 57.9, the highest level since April 2010, from 55.8 in July.

Europe

European shares rose yesterday, with French industrial group Legrand outperforming in response to a broker upgrade. Legrand rose 4.4 percent, making it the best-performing stock in percentage terms on the FTSEurofirst 300 index, after Bank of America Merrill Lynch raised its rating on the stock to "buy" from "neutral."

Industrial companies such as Legrand, which exports goods overseas, are expected to benefit from any new ECB action which could weaken the euro currency, as a weaker euro would help them sell their products abroad at more attractive prices.

But European stock markets remained within a tight range as investors await the European Central Bank's (ECB) policy decision later this week.  Following dovish comments by ECB President Mario Draghi, which sparked market bets that the central bank is preparing to pump more liquidity into the system, possibly via purchases of government or corporate bonds, a measure known as quantitative easing (QE).

While most market participants do not expect the ECB to take major easing steps this week, further measures are expected in the face of risks to euro zone growth posed by low inflation as well as the Ukraine conflict, where Kiev forces are fighting pro-Russia separatists.

Euro Stoxx 50 was up 0.17%, FTSE 100 was up 0.06%, CAC40 ended the session down by 0.03% while the DAX ended the day 0.3% up.

Global Data

The news on manufacturing was less positive in the U.K. as factory growth slowed more than forecast last month and Italian manufacturing shrank as Europe suffered the fallout from weakening demand and mounting geopolitical risks. Output growth in China also slowed.

The S&P 500 jumped 3.8 percent in August, climbing above 2,000 for the first time, amid improving economic data and speculation the Fed will keep interest rates low even as the economy shows signs of strengthening. The gauge has advanced 8.1 percent in 2014.

The economy expanded more than previously forecasted in the second quarter, propelled by the biggest gain in business investment in more than two years, the Commerce Department reported last month. A Labor Department report on Sept. 5 will show payrolls rose by more than 200,000 in August for a seventh-straight month, a Bloomberg survey of economists showed.

Ukraine Conflict

In Ukraine, the government warned of an escalating conflict in its eastern most regions, even as U.S. President Barack Obama headed to Eastern Europe to reassure NATO members. Ukraine and its allies in the U.S. and Europe accuse Russia of dispatching troops and backing separatist militias to open a new front in the conflict. Russia has repeatedly denied involvement in the unrest.

Russian Foreign Minister Sergei Lavrov said Ukraine’s allies are stoking the five-month conflict and should back peace talks, even as President Vladimir Putin sought to calm concern over remarks his army could “take Kiev” in a matter of weeks. Ukrainian Defense Minister Valeriy Geletey said defenses must be strengthened in the face of a “full-scale invasion” by Russia.

Russia, which is facing further sanctions as early as this week over the unrest, has repeatedly denied involvement. Obama will visit Tallinn, Estonia, on his way to this week’s North Atlantic Treaty Organization summit in the U.K.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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