Markets Shaken by US Coupling

The US decoupling story from the weakening global economy is dealt a severe blow after Tuesday's ugly US economic reports. Global equity indices resume their sell-offs as the ISM manufacturing survey slumped to 10-year low, raising fresh questions on whether the division inside the Fed could jeopardize markets. SPX and DOW30 futures are currently below their 100-DMA at 2918 and 26380 respectively. The US ADP employment report is due later today. The Premium short trade in DOW30 was closed for a 480-pt gain, while 2 other trades in indices remain deep in the green. Ashraf tells me several clients had questioned the decision to issue three different trades in indices (all shorts) at a time when the market was lifting higher.

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Markets had initially been off to a solid start in October with sentiment steadily improving. The solid mood was underscored by the final Markit manufacturing PMI. It was bumped to 51.1 from 51.0 in the preliminary reading and it helped to solidify expectations for a solid reading in the ISM survey to be released shortly afterwards. The result was anything but solid. It sank to 47.8 from 50.0 expected and to the lowest level since 2009. New orders and employment were particularly soft.

The data flipped the script on theme in the markets as USD/JPY dropped to 107.55 from 108.45, while US 2-year yields fell 13 bps intraday in hint that the Fed may have to ease sooner rather than later. US crude oil has reversed all of last week's gap, hitting $53.05.

The sudden weakness puts an extra focus on this busy week of US economic data starting with the ADP report at 12:15 GMT (13:15 London). The survey has been a poor predictor of non-farm payrolls lately, so the effect may be more muted, even on a wide miss from the +140K estimate. Other data still to come this week includes the services PMIs, factory orders and non-farm payrolls.