The trade: manufacturing weakness triggers sell-off in US markets

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This video was created on 5 September for IG audiences by ausbiz.

Manufacturing data sparks sell-off

IG's Tony Sycamore highlights the current market situation, and what might lie ahead. The US market saw a sharp sell-off after weaker-than-expected manufacturing data, raising concerns about the economy’s strength.

Although manufacturing in the US isn’t as critical as in countries like China, the recent Institute for Supply Management (ISM) report showed ongoing weakness. This leaves investors wondering if the market will see further declines or if the recent downturn is a continuation of the August volatility.

Friday’s ISM services purchasing managers' index (PMI) and non-farm payrolls (NFP) data are of importance. As the services sector plays a much larger role in the US economy, these reports will be crucial in determining whether a soft landing is still possible or if the economy is headed for more trouble.

Nasdaq outlook: short-term risks remain

Sycamore remains cautious about the Nasdaq, following a short recommendation earlier in the week. He expects a pullback towards the uptrend support level around 17,700, with the 200-day moving average near 18,000 also in focus.

Given the market’s historical weakness in September, Sycamore believes there’s more downside risk ahead, driven by seasonal factors and technical weakness. "Historically, September has been tough for equities," Sycamore says. "Over the last five years, the S&P 500 has dropped an average of 4.2% in September, and I wouldn't be surprised if we see a similar pattern this year."

ASX 200 faces pressure

The ASX 200 is also under pressure this month, with the index reaching a high early in September. Sycamore suggests the ASX 200 may struggle to push higher, with downside risks growing. The key levels to watch are the trend channel support around 7700 and the 200-day moving average.

If US equity markets continue to slide, the ASX 200 is likely to follow, with potential to drop towards the 7700 level.

Currency and commodity movements

The US dollar strengthened overnight as risk-off sentiment prevailed, pushing investors toward safe-haven assets. The AUD/USD pair has been highly volatile, recently hitting a fresh nine-month low due to concerns about weak Australian gross domestic product (GDP) data.

Commodities also saw widespread declines.Brent crude oil dropped 5%, driven by the potential resolution of the Libyan conflict and weaker-than-expected Chinese PMI data. Sycamore suggests oil prices could decline further, with Brent possibly targeting the mid-60s.

Bitcoin struggles for direction

Bitcoin remains under pressure, failing to act as a safe haven despite broader risk-off moves. The cryptocurrency has now seen eight consecutive closes below $60,000. Sycamore warns that a break below support at $56,000 could push Bitcoin down to the low 50s.

Fed’s decision looms large

Investors are now turning their attention to Friday’s economic data and the US Federal Reserve’s (Fed) upcoming meeting. According to Sycamore, there is currently a 60% chance of a 25 basis-point (bp) rate cut and a 40% chance of a 50 bp cut.

While a larger interest rate cut could signal deeper economic problems, Sycamore hopes for a smaller 25 bp cut, with the possibility of better-than-expected data easing some concerns. Friday’s ISM services PMI and NFP reports will be critical in determining the Fed’s next move and the market’s direction.