GBP plunges post BOE, ASX to gap lower as weak ISM rocks Wall Street

ISM manufacturing contracted at its fastest pace in eight months while the employment and new orders indices also expanded their pace of contraction. Given the Fed are showing concerns over the economy, investors are nervous that we could be veering closer to the hard landing we all thought we could avoid. Most notably, respondents in the report frequently noted a slowdown in sales and demand. This marks a more volatile summer than traders are accustomed to and should keep investors on their toes as we head towards the US election in November.

Volatility remains a two-way street on Wall Street with the VIX spiking to a 14-week high and the S&P 500 and Nasdaq erasing most of Wednesday’s post-Fed gains. The Dow Jones went a step further and formed a bearish outside day.

US yields continued to fall as investors returned to the bond market on bets of multiple Fed cuts. The 10-year yield dropped below 4% for the first time since February and the 2-year is just 17 bp higher at 4.15%, as the yield curve continues to normalise.

Traders are now pricing in multiple cuts for other central banks with the Fed in dovish mode. Soft inflation Q2 inflation data for Australia has killed bets of an RBA hike, and only seems a matter of time before calls for cuts resurface. AUD/USD was the second weakest FX major

The Bank of England cut their interest rates by 25bp to 5%, to mark their first cut since the pandemic. Yet it was a close call as only 5 of the 9 MPC voters backed the cut, which means decisions going forward remain just as finely balanced as it was going into this meeting. Inflationary “bumps in the road” remain and the BOE are not committing to further cuts, according to chief economist Hue Pill.

Yet traders continued to bet on further BOE rate cuts despite a cautious tone from the BOE. GBP/USD was the weakest FX major, falling close to -1% during its worst day in three months, marginally below the April 22 trendline. GBP/JPY fell over -1% for a third day to a three-month low, taking its decline form the July high to -8.6% in just three weeks.

The yen continued to strengthen in a risk-off environment, bolstered on bets of further hikes by the BOJ. However, while the yen was up across the board, its upside volatile was much lower compared with Wednesdays which suggests yen bulls are losing steam.

WTI crude oil fell -2% on a combination of weak US economic data and Middle East tensions. OPEC+ also kept policy unchanged but warned they could unwind their output cuts in future, which would remove a pillar of support for oil prices.   

Events in focus (AEDT):

• 11:30 – AU producer prices, home loans
• 21:15 – BOE member Pill speaks
• 22:30 – US nonfarm payrolls report

ASX 200 futures (SPI 200) technical analysis:

Australia’s premier stock market couldn’t escape the bearish winds of Wall Street, despite reaching a record high on Wednesday. The small doji above 8000 was failed to hold up, and was met with a large bearish engulfing day which made light work of the 8000 milestone. The day closed on the 20-day MA, but to see the ASX 200 simply accelerating back to new highs seems unlikely in the current environment. Instead, traders may want to fade into rallies or sell with a break of lows in anticipation of its next leg lower.

Keep in mind that a weak NFP report could further weigh on Wall Street sentiment and drag the ASX 200 lower with it.

The 1-hour chart shows support was found around 7900 and RSI (14) reached oversold in the US session. But given the speed of the decline from the ATH, bears may be tempted to fade into moves below 8,000 and target the 7,800 area.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge