On Tuesday, all three major indices in the U.S. stock markets plunged again. What does it mean for the U.S. economy and the gold market?
The rebound in the U.S. stock markets after suffering their worst month in three years in August was surprisingly short-lived. The equities rose for just two days and on Friday the fuel ran out. Monday’s declines looked innocent, however, yesterday all three major indices in the U.S. stock markets closed down more than 2.8 percent.
What caused the declines? The direct impulse was weak data from China and the U.S. The final Caixin China General Manufacturing PMI, which focuses more on small and medium-sized firms, declined from 47.8 in July to 47.3 in August, marking a contraction at the fastest rate since March 2009. And China's official PMI, which focuses on state-owned enterprises and large companies, decreased from 50 in July to 49.7 in August, the weakest level since August 2012. The number below 50 indicates a contraction. Weak manufacturing data reminded investors that China and the entire global economy are slowing down.
Another blow came from the U.S. The ISM index fell from 52.7 in July to 51.1 in August, the weakest reading since May 2013 and significantly below market expectations. What is especially worrisome is that backlog and new export order are in their third straight months of contraction. It should be now obvious that the U.S. economy is not decoupling from the global economic cooling. Without the Fed’s support, we should expect further declines in the U.S. stocks, as they are clearly overvalued. Luckily, the U.S. central bank takes care about Wall Street, so volatility in equity markets could delay the Fed’s interest rate hike, which should be positive for the price of gold.
The key takeaway is that the bear market in the U.S. stocks is probably not over. The global economy is slowing down. When investors realize the full consequences of China’s cooling, we should expect further declines in the overvalued equity markets. Falling stock prices should make the shiny metal more attractive for the investors, especially in the low real interest rate environment, however, the strong greenback would exert some downward pressure.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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