Dow Futures Gain, Dollar Hits Fresh 2-Year Highs Despite Growth, Trade Concerns

The Wednesday Market Minute

  • Global stocks retreat following data indicating the weakest pace of US factory activity in more than decade and the biggest single-day decline on Wall Street in more than a month.
  • Asia stocks further rattled by North Korea's firing of a ballistic missile, possibly from a submarine, as working-level talks with the U.S. loom.
  • European stocks open weaker, with basic resource stocks leading to the downside.
  • Oil prices edge higher as the dollar retreats on rate-cut bets and API data shows a surprise 5.9 million barrel decline in domestic crude stocks.
  • US equity futures suggest a flat open on Wall Street  ahead of trade balance data at 8:30 am Eastern time. 

Market Snapshot

U.S. equity futures may struggle to rebound from the biggest single-day decline on Wall Street in more than a month, with investors shying away from risk markets following a grim reading of factory activity in the world's biggest economy that has sparked concerns for a trade-lead global recession.

The ISM Manufacturing survey indicated the weakest pace of factory activity in more than a decade last month, with export orders tumbling amid the protracted U.S.-China trade dispute and employment contracting as plants and facilities idled and investment stalled. The data, which hammered U.S. stocks and triggered a sharp reversal in Treasury bond yields, followed the weakest reading for European manufacturing in seven years and ongoing signals of a sharp slowdown in both China and Japan.

President Donald Trump used the data to rail yet again at the U.S. Federal Reserve, calling the central bank "pathetic" for not lowering interest rates further and thus inflating the value of the dollar. However, most analysts noted that trade uncertainty, not dollar strength, was the common theme among those polled by the closely-followed survey, suggesting deeper concerns for the global economy.

"This survey is a not consistent with recession across the whole economy, but the warning signs here are clear enough: The trade war is wreaking havoc, to the point where the incipient upturn in manufacturing in China is not transmitting, at all, to the U.S.," said Pantheon Economics' Ian Shepherdson. "This means that if consumers' confidence seriously falters, the U.S. could tip into the first recession ever caused directly by the actions of the President rather than the action of tight monetary policy on an overstretched private sector."

Stocks in Asia followed the sharp selling on Wall Street last night, which saw the Dow Jones Industrial Average tumble nearly 350 points in the biggest single-day decline since late August, with Japan's Nikkei 225 falling 0.49% in Tokyo and the Hang Seng retreating 0.23% in Hong Kong.

South Korea's KOSPI, meanwhile, slumped 1.84% following reports of that North Korea fired a ballistic missile, possibly from a submarine, just days before talks with US officials are set to begin.

Early indications from U.S. equity futures suggest a flat open on Wall Street, with contracts tied to the Dow marked for a 135 point dip and those linked to the S&P 500, which fell 1.2% to a four-week low last night, poised for another 15.4 point pullback after data from payroll processing firm ADP showed the private sector added a smaller-than-expected 135,000 net new jobs last month. 

The overnight "risk off" trading piled upward pressure on the yen, the traditional safe-haven currency for regional investors, while simultaneously pulling the U.S. dollar index south of the two-year highs it reached yesterday to trade at 99.22.

The dollar was also pressured by interest rate traders adding to bets on a near-term support from the Fed, with the CME Group's FedWatch tool suggesting a 63.6% chance of a rate cut at the central bank's October 30 meeting, up from just 53.4% a week ago. The FedWatch tool is also pricing in a near 80% chance of a rate cut between now and the end of the year.

Benchmark 10-year U.S. Treasury bond yields, meanwhile, held near a multi-week low of 1.628% in overnight trading, while 2-year notes were seen at 1.518%.

European stocks were also on the back foot, with the Stoxx 600 benchmark falling 1.5% in the opening hours of trading in Frankfurt, lead to the downside by oil and gas and basic resource stocks. 

Britain's FTSE 100, meanwhile, slumped 2.2%, trimming its year-to-date again to just 7%, amid today's Conservative Party conference in Manchester, during which Prime Minister Boris Johnson failed to unveil details of his "final offer" on Brexit to EU Officials before Britain's October 31 exit deadline.

Global oil prices saw overnight gains supported by data from the American Petroleum Institute late Tuesday showing a 5.9 million barrel decline in domestic crude inventories last week.

Brent crude contracts for November delivery, the global benchmark, were seen 26 cents lower from Tuesday's New York close to trade at $59.15 per barrel while WTI contracts for the same month, which are more tightly linked with U.S. gasoline prices, were marked 44 cents higher at $54.06 per barrel.