Ella 
The U.S. stock market plummeted yesterday. The tech-heavy Nasdaq underperformed, falling 3.26%. The EURO STOXX 50 Index (-1.22%) has perfect bearish engulfing. Volatility surged, with the Vix jumping to its highest level since the market’s woes in early August. The stock market’s comeback since that crash has been impressive, with U.S. stocks even approaching previous all-time highs. High valuations based on a soft landing for the U.S. economy leave stocks vulnerable to profit-taking. Against this backdrop, yesterday’s U.S. manufacturing ISM was unconvincing, making markets nervous ahead of the remaining more important data, including services ISM and wage reports. We also note further sharp declines in commodities (iron, oil…), which in the current situation is seen by the market as a sign of weakening global demand. Risk sentiment spread to core bond markets, with U.S. bond yields down 5.1 to 8 basis points and German yields down 4.1 to 7.3 basis points. Germany’s 10-year bond yield even reversed Monday’s gains. Currency markets behaved as expected, with the Japanese yen (USD/JPY 145.48), the Swiss franc (EUR/USD 0.939) and the US dollar (EUR/USD 1.104) leading the gains. Commodity-linked currencies such as the Australian dollar, Norwegian krone and New Zealand dollar remain on the defensive.
Yesterday’s price action illustrates the market’s mentality. The balance of risks (in terms of market reaction) has shifted, and we believe data releases in line with or below market expectations are likely to trigger the most volatility. The Fed cut interest rates by about 35 basis points in September, so there is still room for a 50 basis point rate cut. Today’s JOLTS report could add to those bets. With U.S. 2-year and 10-year rates approaching or actually testing August (except August 5) lows, the downward trend in core/U.S. yields appears fragile. If it breaks below the lows, the technical picture will deteriorate significantly and the Fed’s easing expectations will change, not only next week, but even beyond. But we maintain that this will be determined by Friday’s non-farm payrolls data. If this happens, the dollar will pay a heavy price. From a daily perspective, we have a neutral view on the US dollar.
