Dow futures tumble ahead of NFP as market prepares for life after QE

Stocks are plunging for a second day and it could potentially get really ugly once the nonfarm payrolls report is released. In normal circumstances, a stronger jobs report would be positive for stocks. But given the equity markets’ response to the robust second quarter US GDP reading and mostly positive corporate earnings results, the “good equals bad” formula may be back as the market prepares for life after QE. Although raised geopolitical risks may also have weighed on the sentiment, it is most likely not the main reason. After all, the markets that should be responding positively to geopolitical concerns, namely crude oil and the safe haven gold, have repeatedly failed to do so. Indeed, Brent crude is falling today even though the planned ceasefire between Israel and Hamas has collapsed while the on-going uncertainty surrounding Ukraine continues to make headlines. News of the Argentina default may however be a contributory reason for the plunging stock market as there are many banks and other companies in the US and elsewhere that have direct or indirect exposure to Buenos Aires.

Stronger US data may be bad for stocks, good for dollar

In July, the US economy is expected to have created around 230 thousand jobs while the rate of unemployment is estimated to have remained unchanged at 6.1%. If correct, this would be the sixth straight month that we have had a reading higher than 200k since 1997. (For a full preview of the NFP, you may want to read my colleagues Matt Weller and Neal Gilbert’s article here.) It is also worth watching out for some of the inflation gauges that are released at the same time as the jobs report: the core PCE price index and the average hourly earnings index are both expected to have risen by another 0.2% each in June and July respectively. Personal spending and income figures will complete the US data dump at 13:30 BST (8:30 EDT) and are both expected to have risen about half a per cent in June. But there’s more later on in the day, with the UoM consumer sentiment and the ISM manufacturing PMI being among the highlights. So, plenty of macro pointers to look forward to on this first day of the month and there’s potential for significant moves in both the dollar and stocks. While the dollar may well respond positively to a good set of numbers, stocks however may do the opposite (see paragraph above for my reasoning).

Technicals looking bleak, but oversold

The major US stock indices closed the month of July lower, with the Dow and S&P ending their 5-month winning streak. From a technical point of view, both indices are looking fragile and more losses could be on the way, but they also look a little oversold in the near term and so may bounce back slightly before making their next moves. Ahead of the US jobs report, the Dow future is trading around 16460 after slipping below a bullish trend line at 16500. But here, it is testing the 38.2% Fibonacci retracement level of the last notable rally from the February low point. So, there’s the possibility that it could end the day in the black and thus maintain or prolong the long bullish trend. The next key level to watch on the downside is around 16345/50 – this being the 200-day moving average. The 50 and 61.8 per cent retracement levels of the aforementioned price swing come in at 16245 and 16030, respectively. If the Dow turns around and closes the day higher, then we could well see some gains early next week. For now though the chances of that look slim.