European and US stock futures experienced a decline on Wednesday, mirroring the deep losses in Asian equities following a significant selloff in US markets. The Euro Stoxx 50 contract dropped 1.3%, while S&P 500 futures fell 0.5%, extending the overnight losses on Wall Street. The downturn in Asian markets was particularly severe, with a regional equity benchmark falling more than 2%, driven by renewed concerns over the artificial intelligence sector. Major chipmakers, including Taiwan Semiconductor Manufacturing Co. and SK Hynix Inc., saw their shares fall by at least 4%.
Economic Weakness and Market Sentiment
The decline comes amid a risk-off mood at the start of a historically challenging month for markets. Disappointing US manufacturing data has shifted investor focus toward the potential for an economic slowdown in the world’s largest economy, adding to already weak sentiment in Asia. In particular, a series of disappointing economic data from China has further dampened risk appetite.
Charu Chanana, head of FX strategy at Saxo Markets, expressed caution, noting that the impact of the August 5 market move continues to linger. The uncertainty over whether the economy will experience a hard or soft landing is contributing to investor wariness. Chanana suggested that weak data could raise recession concerns, while stronger data might reduce expectations for rate cuts.
Market Reactions and Treasury Yields
Following a sharp drop in Treasury yields on Tuesday, yields steadied. The Bloomberg Dollar Spot Index ended a five-day winning streak, its longest since April, while the yen appreciated. Oil prices also fell, continuing a decline of nearly 5% on Tuesday due to concerns about weak demand and oversupply.
The early August selloff, which had initially appeared to signal the start of a prolonged downturn, was later viewed as a temporary pause in the bull market. Expectations for US rate cuts quickly erased the slump, with recovery momentum bolstered by dovish comments from Federal Reserve Chair Jerome Powell at the Jackson Hole symposium.
Regional Developments
In Asia, the Australian dollar retained its losses as data indicated persistent economic weakness in Australia for the June quarter. Chinese stocks dropped following a private survey showing less-than-expected expansion in services activity, highlighting the ongoing fragility of the Chinese economy.
US Market Performance
The S&P 500 and Nasdaq 100 recorded their worst starts to September since 2015 and 2002, respectively. Despite anchored inflation expectations, attention has shifted to economic health, with signs of weakness potentially accelerating policy easing. However, rate cuts might not favor equities if the Federal Reserve is compelled to act urgently to prevent a recession.
Fear Gauge and Market Volatility
The VIX, often referred to as Wall Street’s “fear gauge,” surged, reflecting heightened market anxiety. Vishnu Varathan, head of economics and strategy at Mizuho Bank, noted that September’s reputation for wavering risk appetite could be exacerbated by US recession risks and the unwinding of yen carry trades.
Anticipated Federal Reserve Actions
Traders are expecting the Federal Reserve to reduce rates by more than two full percentage points over the next 12 months, marking a significant drop outside of a downturn since the 1980s. The week’s economic data will be crucial, with a report showing US manufacturing activity contracted in August for the fifth consecutive month. The focus will shift to the key US jobs report later this week, which is anticipated to show an increase of about 165,000 payrolls, based on Bloomberg’s median estimate.
Key Market Moves
Stocks
- S&P 500 futures fell 0.5% as of 6:27 a.m. London time.
- Japan’s Topix dropped 3.5%.
- Australia’s S&P/ASX 200 fell 2%.
- Hong Kong’s Hang Seng fell 1.3%.
- The Shanghai Composite declined 0.6%.
- Euro Stoxx 50 futures fell 1.2%.
- Nasdaq 100 futures fell 0.7%.
Currencies
- The Bloomberg Dollar Spot Index fell 0.2%.
- The euro rose 0.1% to $1.1058.
- The Japanese yen increased 0.2% to 145.15 per dollar.
- The offshore yuan rose 0.2% to 7.1093 per dollar.
- The Australian dollar fell 0.1% to $0.6704.
- The British pound remained stable at $1.3117.
Cryptocurrencies
- Bitcoin fell 2.9% to $56,526.98.
- Ether decreased 3.3% to $2,380.64.
Bonds
- The yield on 10-year Treasuries was little changed at 3.82%.
- Japan’s 10-year yield fell 3.5 basis points to 0.885%.
- Australia’s 10-year yield decreased seven basis points to 3.93%.
Commodities
- West Texas Intermediate crude fell 0.5% to $69.98 a barrel.
Conclusion
The global market is navigating a period of significant volatility, with declines in stock futures, economic data influencing investor sentiment, and heightened caution across various asset classes. As markets brace for key economic reports and potential shifts in Federal Reserve policy, the current landscape remains challenging for investors.
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