A look at the day ahead in U.S. and global markets from Mike Dolan
Wall Street seems to be making a habit of these early month stock plunges, with Tuesday's tremor a mild aftershock from the brief August quake one month ago.
Given that September historically tends to be the worst month of the year for stock market returns - with August a close second - then seasonal flurries like this probably should be treated as such. This too will likely pass.
And yet there's inevitably some anxiety that the sharp retreat from near record highs is rooted in something more fundamental. And on that score, this week's critical U.S. employment report and another dour reading on global manufacturing for August cranked up the tension again.
While factories in the U.S. and around the world have been spluttering for the best part of two years, there had been some sign of a manufacturing upturn earlier this year. But the sector seems to be suffering a relapse, not least as China's economy continues to struggle with its property bust and growth there wanes.
U.S. output contracted again in August, according to Tuesday's release of the Institute for Supply Management's latest factory survey, even if some modest improvement in employment readings may ease fears for this week's big labor market readouts. The first of those starts today with a report on July job openings.
But survey signs of a further decline in new orders and rising inventories suggested a deepening slowdown in manufacturing is taking hold.
What's more, JPMorgan (NYSE:JPM)'s global manufacturing index slipped to its weakest reading of the year and registered its second month in a row in contractionary territory.
"More concerning are signs that business equipment spending is losing steam - potentially pointing to a weakening in the pace of hiring as well," the bank said in a report.
While manufacturing only accounts for about 10% of the U.S. economy, it's 15% of euro zone GDP, 20% of Germany's output and 26% of China's.
More dominant service sector readings are offsetting the gloom - with euro zone surveys on Wednesday showing the overall business activity signal still expanding last month and only marginally below forecast as the Paris Olympics seemed to lift the mood.
Still, the factory wobble seems to have been enough to knock back the stocks again as the S&P500's 2% loss on Tuesday clocked its worst day in a month and the VIX volatility gauge jumped back above its long-term averages.
Adding to the angst was a near 10% drop in artificial intelligence bellwether Nvidia (NASDAQ:NVDA), its worst day since April and marking its biggest ever one-day loss in market value with a $279 billion wipeout.
The stock lost another 1% out of hours overnight after Bloomberg reported the U.S. Department of Justice has sent a subpoena to Nvidia as it deepens its probe into the AI heavyweight's antitrust practices.
Stocks around the world were caught in the slipstream on Wednesday, with Japanese, Taiwanese and Korean markets all suffering 3-4% swoons.
European stocks lost another 1% and Wall St stock futures remained slightly in the red.
With growth clouds nudging up Federal Reserve easing expectations, there was some relief for global investors from the rally in Treasuries - sustaining the newly negative correlation between stocks and bonds that re-emerged last month.
The chances of a Fed rate cut of as much as 50 basis points rose to about 40%, with 104bps now priced for the year.
Two-year Treasury yields plunged to 3.83% - their lowest since May last year - and 10-year yields ebbed too.
The bond rally was encouraged by a sharp drop in oil prices - which were hit by worries about global manufacturing, a likely resumption of Libyan supply after the recent outage and expectations of an increase in overall OPEC output next month.
U.S. crude prices fell below $70 per barrel for the first time since Jan. 2 and year-on-year price drops are now running at close to 20%.
The dollar index, which hit a two-week high on Tuesday, slipped back again. And there was little sign of a renewed "safety bid" in the likes of gold or Bitcoin, which both fell today.
Japan's yen was slightly firmer after this week's latest reiteration from the Bank of Japan that it plans to continue tightening.
And the Canadian dollar found a foothold as it awaits another Bank of Canada interest rate cut later today - the third of the year so far even before the Fed gets going.
Key developments that should provide more direction to U.S. markets later on Wednesday:
* Bank of Canada policy decision, news conference from BOC governor Tiff Macklem
* US July job openings, July international trade balance, July factory goods orders; Canada July trade balance,
* Federal Reserve publishes 'Beige Book' on economic conditions; European Central Bank board member Frank Elderson speaks
* US corporate earnings: Hewlett Packard Enterprise, Dollar Tree (NASDAQ:DLTR), Hormel Foods (NYSE:HRL), Copart
(By Mike Dolan, editing by Philippa Fletcher; mike.dolan@thomsonreuters.com)