US stocks were only slightly lower Monday as expectations of more stimulus from the Federal Reserve put a floor in the market after data showed the U.S. manufacturing sector contracted for the first time in nearly three years last month.
The Institute for Supply Management’s June manufacturing index showed the U.S. factory sector suffered its first contraction since July 2009. The data from the world’s biggest economy added to a picture of deteriorating business activity painted by similar surveys in Europe and China.
But even with the troubling outlook stocks were remarkably resilient, especially after posting their biggest daily gains this year in the last session. Investors said weak data points were increasing hopes the Federal Reserve would intervene to boost the economy with more easy money policies.
“I would think that the market would be down far more than it is and I think it’s because there is some underlying support from Federal policy,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.
“Investors are unwilling to get too ahead of themselves with regard to the pressure they’ll put on equity prices knowing that in the event that that comes out they could have their heads handed to them,” said Luschini.
UBS cut its year-end target on the S&P 500 index to 1,375, from 1,475. The firm’s equity analyst Jonathan Golub, strategist at UBS, cited deterioration in incoming U.S. economic data; the Supreme Court’s health care ruling, which he says will contribute to greater partisanship ahead of year-end fiscal discussions; and a more contentious tone among European policymakers, despite success at the Euro summit.
The Dow Jones industrial average dropped 57.82 points, or 0.45 percent, to 12,822.27. The Standard & Poor’s 500 Index dropped 3.6 points, or 0.26 percent, to 1,358.56. The Nasdaq Composite Index dropped 0.04 points, or 0 percent, to 2,935.01.
The next Fed policymaking meeting takes place July 31-Aug. 1.
Mergers and acquisitions activity also helped plug the market. Shares in Amylin Pharmaceuticals Inc. rose 8.9 percent to $30.72 after Bristol-Myers Squibb Co. said it will buy biotechnology company. Shares of Bristol-Myers added 1 percent to $36.31.
Shares in Best Buy jumped 9.8 to $23.02 as takeover expectation continued around the company. On June 26, Best Buy founder Richard Schulze was reported by the Wall Street Journal to be exploring a buyout of the company in combination with Credit Suisse.
Eurozone manufacturing shrank again in June and factories are preparing for worse, according to business surveys showing jobs were cut at the fastest pace in two-and-a-half years. The data showed factories in Germany and France are succumbing to a downturn that started in southern Europe.
Manufacturing in China, the world’s second biggest economy, also worsened in June with export orders, usually an indicator of global economic health and trade flows, posting their biggest fall since December.
“This is clearly very, very troubling. It indicates that at least in the month of June the manufacturing sector of the [U.S.] economy contracted and there is meaningful evidence of, at a minimum, disinflation,” said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany.
Separate data showed U.S. construction spending rose to its highest level in nearly two-and-a-half years in May, but market reaction was muted.
European stock markets rallied while the euro fell against the dollar as a trend sparked by last week’s surprise EU deal was underpinned by anticipation of an ECB rate cut, analysts said.
Focus was also on the banks, as Barclays chairman Marcus Agius paid the price of “devastating” damage to the lender, resigning over the rigging of key global interest rates which has sullied London’s image as a financial center.
London’s benchmark FTSE 100 index jumped by 1.25 percent to 5,640.64 points, with the increase accelerating toward the end of the session, which was also the first trading day of the third quarter.
The interest rates which Spain and Italy must pay to borrow, critical factors in the eurozone debt crisis, edged higher following a sharp drop Friday.
Frankfurt’s DAX 30 advanced 1.24 percent to 6,496.08 points and in Paris the CAC 40 climbed 1.36 percent to 3,240.20. Madrid’s IBEX 35 gained a slight 0.31 percent to 7,124 points.
Poor eurozone data suggested to many investors that the European Central Bank would cut its main interest rate Thursday from the current record low of 1 percent.
Unemployment rose to a euro-area high of 11.1 percent while manufacturing purchasing managers indexes across Europe continued to show activity contracting, though some PMIs exceeded expectations.
On Friday, European leaders agreed to use emergency funds to support ailing banks directly and to ease pressure on governments’ debt burdens through direct bond purchases, if necessary.
They also agreed to cobble together $150 billion to boost growth.
“The European summit concluded without agreement on the long-term details [fiscal union, etc.], but did offer relief for Spain and Italy with direct bank funding” from the future European Stability Mechanism, the National Australia Bank noted.
It added the agreement was “positive, but there are questions about how long this takes to establish,” since a eurozone banking supervisory body to be based at the European Central Bank must be established first.
Official data published Monday showed that eurozone unemployment climbed to a record high of 11.1 percent in May.