A Look at the Day Ahead in U.S. and Global Markets

By Mike Dolan

Wall Street appears to be developing a pattern of early month stock declines, with Tuesday’s tremor being a mild aftershock from last month’s brief decline in August.

Historically, September is considered the worst month for stock market returns, with August not far behind. Therefore, seasonal downturns like this should probably be viewed as typical. This too shall pass.

However, there’s rising anxiety that the sharp retreat from near-record highs may be indicative of deeper issues. This week’s crucial U.S. employment report and grim global manufacturing data from August have heightened concerns.

For nearly two years, U.S. and global factories have been struggling, though earlier signs of a manufacturing upturn appeared this year. Unfortunately, the sector seems to be facing a relapse, particularly as China grapples with its property crisis and slower growth.

The latest Institute for Supply Management factory survey indicated a contraction in U.S. output for August, despite some improvements in employment metrics which might mitigate fears ahead of this week’s labor market data, beginning with the job openings report for July.

Surveys showing declines in new orders alongside increasing inventories are suggesting a more entrenched manufacturing slowdown.

Additionally, JPMorgan’s global manufacturing index fell to its weakest reading of the year, marking its second month in contraction. The bank noted concerns about a slowdown in business equipment spending, which could signal less hiring activity.

While manufacturing constitutes about 10% of the U.S. economy, it represents 15% of the eurozone GDP, 20% of Germany’s output, and 26% of China’s.

In contrast, more robust readings from the service sector are counteracting the bleak manufacturing outlook. Eurozone surveys indicated continued expansion in overall business activity for the last month, with only a slight dip from forecasts, buoyed by the upcoming Paris Olympics.

The ongoing factory instability contributed to stock declines again, with the S&P 500 experiencing a 2% loss on Tuesday, its worst performance in a month, and the VIX volatility gauge climbing above long-term averages.

Adding to market concerns was a near 10% drop in Nvidia (NASDAQ:NVDA), its largest one-day loss in market value, resulting in a $279 billion drop. This occurred amid a U.S. Department of Justice subpoena related to its antitrust practices.

Global markets were affected as well, with Japanese, Taiwanese, and Korean exchanges all reporting 3-4% declines. European stocks dropped another 1%, and U.S. stock futures remained slightly negative.

With economic uncertainties causing increased expectations for a Federal Reserve easing, global investors found some solace in a rally in Treasuries, establishing a renewed negative correlation between stocks and bonds that resurfaced last month.

The likelihood of a Fed rate cut of up to 50 basis points rose to about 40%, with a total of 104 basis points now priced in for the year. Short-term Treasury yields fell to 3.83%, their lowest since May last year, while longer-term yields also declined.

This bond rally was bolstered by a significant drop in oil prices due to concerns about global manufacturing, potential resumptions of Libyan oil supply, and expectations for increased OPEC output next month. U.S. crude prices fell below $70 per barrel for the first time since January 2, showing nearly 20% year-on-year price declines.

The dollar index, which reached a two-week high on Tuesday, retreated slightly, and there was no evidence of renewed interest in safety assets like gold or Bitcoin, both experiencing declines.

The Japanese yen firmed slightly following the Bank of Japan’s commitment to continue tightening. Meanwhile, the Canadian dollar stabilized ahead of another anticipated interest rate cut from the Bank of Canada, marking their third reduction of the year before any Fed actions take place.

Key Developments for U.S. Markets on Wednesday:

• Bank of Canada policy decision, news conference from BOC governor Tiff Macklem
• U.S. July job openings, July international trade balance, July factory goods orders; Canada July trade balance
• Federal Reserve publishes its ‘Beige Book’ on economic conditions; European Central Bank board member Frank Elderson speaks
• U.S. corporate earnings: Hewlett Packard Enterprise (NYSE:HPE), Dollar Tree (NASDAQ:DLTR), Hormel Foods (NYSE:HRL), Copart (NASDAQ:CPRT)

(By Mike Dolan, editing by Philippa Fletcher; mike.dolan@thomsonreuters.com)