The S&P futures are down 10 points, the Nasdaq 100 futures are down 35 points, and the Dow Jones Industrial Average futures are down 86 points. No, the sky isn't falling. All that is happening is that traders are positioning for some weakness in the major indices following a prolonged run of gains.
You'll hear many reports suggest the negative disposition is wrapped up in angst about Catalonia's independence movement and Madrid's move to activate Article 155 of its constitution, which suspends home rule in Catalonia. We find that to be a spurious excuse.
It doesn't stand to reason that market participants would fret so much over the Catalan independence issue when they have had virtually no problem with the UK's decision to exit the EU.
The UK is the world's fifth largest economy and accounts for roughly 16% of EU GDP. Spain is the world's 14th largest economy and accounts for roughly 8% of EU GDP. Catalonia accounts for roughly 20% of Spain's GDP.
Economically-speaking, Catalonia is important for Spain, yet it's not all that important for the EU economy or the global economy. Also, market participants have known for some time that the triggering of Article 155 was a real possibility, and yet, the S&P 500 has increased 1.7% since Catalonia conducted its independence referendum vote.
If the Catalan situation is not the reason for this morning's weakness, what is?
A more credible trigger for traders' angst is the contention from the governor of the People's Bank of China that China is going to make concentrated efforts to curtail excess optimism that could lead to a "Minsky Moment" (i.e. a sudden and major collapse in asset prices following an extended period of debt-fueled growth).
Separately, there are news reports suggesting Apple (AAPL) has cut supplier orders for the iPhone 8 and iPhone 8 Plus for November and December, which investors are presumably interpreting as a sign of relatively weak demand.
Then, there is the thing about today being the 30th anniversary of the '87 crash, which might have some traders feeling a little skittish. Like they didn't see today coming over the prior three sessions, which pushed the S&P 500 up 0.3% this week... or the week before... or the week before that.
What we think is really underpinning this morning's negative bias is perhaps the negative bias itself. Traders are not accustomed to seeing a big dip in the futures these days, and when that transpired overnight, it fed a belief that the time might have arrived for a pullback from a short-term overbought condition.
One can find news triggers to rationalize the selling, but what's happening this morning isn't anything more than a mechanical act of some overdue selling.
The anticipated weakness at the open has lent some support to the Treasury market where prices are up, and yields are down, across the curve in spite of some encouraging economic data this morning.
Initial claims for the week ending October 14 decreased by 22,000 to 222,000 (Briefing.com consensus 236,000), hitting their lowest level since March 31, 1973. Continuing claims for the week ending October 7 decreased by 16,000 to 1.888 million, which is the lowest level since December 29, 1973.
The key takeaway from this report, which saw some disruptions in claims taking procedures in Puerto Rico and the Virgin Islands, is that the low level of claims should translate into some lofty nonfarm payroll expectations for October since this report covered the week in which the household survey was conducted.
On a related note, large increases in the indexes for the number of employees and the average employee workweek led to an uptick in the Philadelphia Fed Index for October from 23.8 to 27.9 (Briefing.com consensus 20.0).