The first US trading session of February, which coincided with the swearing-in ceremony of the new US Federal Reserve chair Janet Yellen, witnessed a blood bath on Wall Street. It turned out be a "risk-off" trading session with both the S&P 500 and the Dow Jones Industrial Average down 2 percent at close.
The Dollar Index traded sharply lower and touched an intraday low of 81.090 from an intraday high of 81.420. Investors took refuge in safe haven currencies such as the Japanese Yen and the Swiss Franc which were bid up in yesterday's session.
The yen is trading at its highest level against the dollar since December, 2013, reflecting the current bearishness towards the US economy in the recent weeks due to soft data. Gold also rallied about 1.3 percent as US 10-year bond yields hit a three-month low.
The sell-off was triggered by a weaker-than-expected US manufacturing index. The reading came in lower at 51.3, whereas the consensus range was between 55 and 56.8.
According to Bloomberg, the US manufacturing index signaled a significant slowing in composite growth for January, at 51.3 for a sharp 5.2 point decline from December. This is the lowest reading since May 2013 and the sharpest monthly drop since May 2011.
Further, the bad news is centered, unfortunately, in new orders which are down a steep 13.2 points at 51.2. This is one of the largest monthly declines on record. If there is solace, it's that the plus-50 rate of 51.3 rate still points to monthly growth, just at a much much slower pace than December according to Bloomberg.
Readings above 50 imply an expansion while readings below 50 signify a contraction. The only silver lining in this dismal reading was that a part of the slowdown in manufacturing could be attributed to the severe winter weather conditions that has adversely affected business activity in the US.
What fueled the sell-off in the afternoon session of US trade was the fact that traders believe the Federal Reserve is on course to wind down its quantitative easing (QE) programmmes by the end of this year. Further, this tapering down is a function of the unemployment rate, which has been gradually trending lower over the last couple of months.
Market participants believe if the momentum in the decline of the unemployment rate continues, we may even get a reading of 6.5 percent as early as this week. It is important to note here that the Federal Open Market Committee (FOMC), in its previous statements, has highlighted the fact that "it would remain accommodative until the unemployment rate remains above 6.5 percent".
Six central bank presidents are due to speak this week, with two of them being voting members of the FOMC. They may calm the markets down by categorically saying that a 6.5 percent unemployment reading is a threshold and not a trigger for a rate hike.
As Ben Bernanke retired into an comfortable academic life with plans for publishing a book on the "Great Recession", whether or not the party continues on Wall Street is in Yellen's hands.
(Vatsal Srivastava is a senior market analyst. The views expressed are personal. He can be contacted at firstname.lastname@example.org)