Any suggestion the United States could dodge the worst effects of the trade wars it has started and the industrial recession they are triggering was knocked back on Tuesday as the contraction in U.S. manufacturing registered by the ISM business survey unexpectedly worsened, as it did in much of the rest of the world.
It caused something of a whiplash in currency markets, which had been pumping up the dollar on hopes the U.S. was decoupling from the stuttering European economy.
The dollar quickly recoiled from its strongest levels in over two years against the euro and on its DXY index, with U.S. stocks having their worst day in almost six weeks as the S&P 500 dropped more than 1% to its lowest level in about month and 10-year Treasury yields retreated to their lowest since Sept. 10.
Whether the ISM shock is enough on its own to change the overall picture and the Federal Reserve’s relatively sanguine outlook for the U.S. economy remains to be seen, but it drew immediate ire from the White House as President Trump blamed what he called the "pathetic" Fed yet again for keeping interest rates too high and the dollar too strong for U.S. manufacturers to weather his tariff campaign.
With trade talks scheduled to resume next week, the stakes are now rising as the latest global factory readings for September indicate a rough end to the year and bring the ‘R’ word back onto the radar for next year.
Morgan Stanley’s cut of the global manufacturing PMI readings for last month shows the series hit another post-credit-crisis low and their aggregate index shows world factory activity contracting for the fourth month in a row.
The dollar recovered some ground first thing on Wednesday as emerging-market currencies from the offshore yuan to Turkey’s lira shivered at the global outlook and the ripple effects went around world stock markets.
Although Shanghai remains closed for the rest of the week, Tokyo’s Nikkei dropped about 0.5% and Seoul’s Kospi plunged almost 2% after reports North Korea fired another ballistic missile into the sea.
Despite one of the worst days of violence in nearly four months of street protests in Hong Kong on Tuesday, the Hang Seng equity index held steady. European shares were weaker again on Wednesday after one of their worst days in almost two months.
And despite the rising recessionary signals German and euro zone sovereign bond yields continued to tick higher. European Central Bank chief Mario Draghi on Tuesday doubled down on his calls for European governments to step up fiscal spending to ward off the slowdown and not rely solely on monetary policy for support.
Chicago Fed chief Evans on Tuesday also opined on the limits of monetary policy to keep economies afloat in a growing global chorus of central bankers signalling monetary and interest rate policy may be maxed out. Euro/dollar hovered back above $1.09 after recovering from more than two-year lows on Tuesday following the ISM release.
Sterling continued to weaken amid the latest reports of UK proposals to break the Brexit deadlock, with the British press speculating about a proposed compromise deal with the European Union that would see Northern Ireland remain in the single market but not the customs union.
Details of the proposals are expected to be outlined by UK PM Boris Johnson in his party conference speech about noon London time today and the EU response will be key.
Australia’s dollar steadied after hitting its weakest in more than a decade on Tuesday following the Reserve Bank’s latest interest rate cut and indications it was prepared to do more.
In the European corporate world, weak U.S. car sales readings are likely to pressure European car makers while the latest estimates for European companies to suffer their worst quarter in three years will also cast a pall over the market, underscoring worries about the health of Europe Inc as the trade war, the global manufacturing slowdown and Brexit bite.
Italy's Atlantia is expected to fall 2% after Reuters reported Italian prosecutors have widened an inquiry into suspected safety breaches at subsidiaries of the toll road and airport company to include more employees and viaducts than they identified last month.
The resignation of Tesco CEO Dave Lewis after six years may offset the supermarket’s better-than-expected first-half results, according to dealers, who see the shares down 2% to 3% while German leasing company Grenke (GLJn.DE) may get a lift after raising its 2019 forecasts.
Credit Suisse could get a boost after it said it expects an estimated $250 million boost to 2020 profit from changes it is making to how it calculates risk-weighted assets and does hedging.
— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —