• Yen and franc gain, aussie the main loser

• Wall Street tumbles on risk-off September start

• ISM mfg. PMI rekindles economic concerns

• Oil collapses on prospect of Libyan accord

Risk aversion prevails

The US dollar outperformed most of its major counterparts on Tuesday, losing ground only versus the traditional safe havens such as the yen and the franc. The biggest loser was the commodity-linked aussie.

The strengthening of the safe havens and the weakening of the risk-linked currencies suggests that risk appetite has deteriorated, and this is evident by the slide in Treasury yields despite the US dollar marching north, but mostly by the tumble in stocks. Wall Street indices recorded their biggest daily percentage decline since early August, with the tech-heavy Nasdaq falling more than 3%.

There was no clear catalyst to begin with, but the ISM manufacturing PMI may have intensified risk aversion. That said, the PMI results on their own do not justify a market response of that magnitude. Perhaps investors turned cautious just on the knowledge that September is the only calendar month to average a negative return over the past 98 years. In other words, it may have been a self-fulfilling prophecy.

It may have been a self-fulfilling prophecy

Nonetheless, history also says that stocks tend to perform better in Septembers leading up to presidential elections. Thus, it will be interesting to see whether a recovery could be on the cards later in the month.

ISM mfg. PMI revives concerns ahead of NFP report

As for the ISM manufacturing PMI, the headline figure rose somewhat, but not as much as expected, with the details of the report painting a mixed picture. Prices paid rose, but the closely watched new orders subindex dipped further into contractionary territory. The employment index inched up, but not enough to climb above 50.

The release may have revived some concerns with regards to the performance of the US economy and that’s why the probability of a 50bps rate cut at the upcoming Fed meeting rose to 43% from 30% at the beginning of the day.

The release may have revived some concerns with regards to the performance of the US economy

Moving ahead, given Powell’s emphasis on the labor market, whether the Fed will indeed begin its easing cycle with a bold move may largely depend on the outcome of Friday’s employment report, where some improvement is expected. However, the failure of the ISM manufacturing employment index to return to growth suggests that there may be some downside risks.

Oil collapses, BoC to cut for a third time in a row

In the energy world, oil prices collapsed yesterday, falling more than 5% on signs of an accord for ending the dispute that curtailed exports and production in Libya. Legislative bodies have agreed to appoint a new central bank governor within a month, raising hopes that production will return to its pre-dispute levels soon.

News that some OPEC+ members are scheduled to increase output by 180k bpd in October may have also weighed on prices. This suggests that now, the only variable that could support oil prices are the Middle East tensions, but they are well overshadowed at the moment.

The oil-linked loonie also slid, with traders today eagerly awaiting the BoC decision. Investors see a third consecutive rate cut as being a done deal, assigning a 75% chance to a 25bps reduction and 25% to 50bps.

Data after the previous meeting pointed to a slowing economy and cooling inflation, justifying a third rate cut in a row. Thus, it is not a question of whether officials will reduce interest rates, but by how much. A 50bps cut could disappoint those expecting a smaller one, thereby pushing the Canadian currency lower.

It is not a question of whether officials will reduce interest rates, but by how much