Overnight US Recap
Following the US ISM miss Tuesday, Treasury yields plummeted, the dollar erased gains, and stocks swung to losses, driving credit spreads wider. Crude futures fell to their weakest levels in a month while gold prices briefly looked above the critical USD 1480 level.
Asia Markets
Any strength seen in the markets was quickly faded due to the ISM factory index printing the lowest reading seen in 10 years as sentiment has remained dour in Asia markets.
Japanese, Hong Kong and South Korean shares all slid, while a misconduct charge smacked Australian equities at one of the country's largest banks.
Why the markets are not trading lower is a bit of a mystery given its tough to debate the fact that the global manufacturing sector is on the cusp if not in a full-blown recession.
Rate Cut Probabilities
The markets are in the process of pricing in October Fed rate cut and while we may get some signals from the slew of Fed speakers, including Chair Powell on Friday, this weeks NFP report has taken on even more significant importance in my view in the wake of the dreadful ISM data. Not so much from a Fed policy perspective but from a tail risk perspective. If the headline number leaks significantly lower than expectations, the equity market could sell large as recessionary fear take hold.
The most explicit and unambiguous signal I'm picking up is the fact that risk assets are not reacting positively to a higher probability of a Fed cut. So, it's no longer a case of bad news is good, but rather lousy news is frightening.
Oil
Commodities are looking very fragile in this environment, and frankly, I 'm surprised oil markets weren't spanked lower in Asia. A one-off API draw in an overly bearish market is hardly enough to plug oil prices from leaking lower, in what may be the early stages of a risk meltdown.
Gold
Happy to see some semblance of sanity return to the gold markets that are finally reacting with a degree of normalcy moving higher as risk aversion starts to set in. I think there is still a bit of shellshock to shake off after the pummeling the retail trading community took early in the week, whereas the recent move was barely a threat to long term buy and hold who are thought to averaged in long at fantastic levels.
Yen
USD/JPY topped out again near 108.50 after the terrible ISM print The JGB move is likely to make USDJPY more volatile in the short term but frankly, I still think USDJPY is too high, given the global economic backdrop and potential for risk aversion to take hold.
Won
Global growth turning south, Long USD/KRW is a tried and proven vehicle for hedging the weaker global growth narrative. The trade makes even more sense with the BoK all but certain to cut interest rates
Why so gloomy?
Back to back contractionary prints on the ISM compounded by the hefty sell-off on the S&P 500 could be the first signal that the Fed easing inspired equity market rallies could be a thing of the past as investors may interpret a Fed policy pivot to an explicit easing bias as the ultimate leading indicator of an ailing economy.