A rather disappointing jobs report filtered through markets on Thursday, 1 June 2017. According to the NFP data, 180,000 jobs were forecast, but only 138,000 jobs were added to the US economy. This follows the April figure of 174,000 which was a downward revision of the forecast figure of 185,000. The NFP job gains in May largely accrued in mining and healthcare. Mining added 7,000 jobs and health care added 24,000 jobs. Additionally, employment opportunities in professional and business services increased, at a slower pace than the monthly average. Other areas of improvement included food services and drinking places (+30,000).
Currently, the US unemployment rate remains steady at 4.30% down from its previous reading of 4.40%. Notable declines were reported in government payrolls (-9,000) and manufacturing payrolls (-1,000). The number of unemployed persons dropped from 7.202 million to 7.056 million, and the average weekly hours remained steady at 34.40. Unfortunately, the US still has a rather low LFPR (Labour Force Participation Rate) of 62.70. This means that there are people in the economy who are employed or unemployed. It says nothing of those people who are not in the workforce and actively seeking employment.
Sentiment Drives Markets
The most important determinant of the performance of Wall Street stocks is corporate profitability. If listed companies are generating profits, indices will remain at bullish levels. Every time quarterly earnings are released, traders, speculators and investors pour over the data and make predictions about stocks. Positive earnings releases (earnings beats) generally result in rising stocks, while negative earnings releases generally result in falling stock prices. It should be remembered that there are a handful of companies that dominate the market, notably Microsoft, IBM, General Electric, General Motors, Facebook, Apple and the like. When these power players perform poorly, they can drag entire indices lower.
However, poor earnings are not necessarily a bad thing according to Lionexo trading options expert, Hamish R. Falconberg: ‘If a company reports lacklustre earnings that beat analysts’ expectations, this is likely to result in a higher stock price regardless.’ Overall though, it is the macroeconomic variables that determine which way markets are moving. The most important economic indicators are GDP (Gross Domestic Product), NFP data (nonfarm payrolls), consumer sentiment, CPI data, interest rate decisions and the like.
Bullish data releases tend to strengthen sentiment which then powers markets. Similarly, negative data releases tend to drive sentiment in the opposite direction. A decreasing unemployment rate (as we are seeing in the US) is a bellwether for quantitative tightening with the Fed. Since the FOMC seeks evidence of an improving US economy, lower unemployment is a positive sign.
Traders Divest from Emerging Markets during Risky Sessions
Across the Atlantic and the Pacific, European and Asian bourses take their cue from the US economy. With trillions of dollars invested in US equities markets, a hiccup on Wall Street can send shockwaves around the world. Countries whose economies are dominated by commodities – South Africa, Brazil, Russia, India, China – are heavily dependent on the prices of commodities.
When the USD rises sharply, this tends to have a negative effect on commodity markets. Likewise, when the GDP rate in China starts to decline commodities demand decreases accordingly. This can dramatically upend the performance of commodity-rich economies like South Africa, Brazil and Australia. During economic contractions, the first place that investors retreat from is emerging market economies. During these times, investors will actively seek out safe-haven opportunities like gold, crude oil, treasuries and the Japanese Yen.
