Asian equities and U.S. Treasury yields fell, while the Swiss franc and Japanese yen strengthened as investors sought safety on Friday. This market reaction followed disappointing U.S. factory data that intensified fears of a deteriorating economic outlook.
The Institute for Supply Management’s (ISM) manufacturing index sank to an eight-month low in July, driven by a decline in new orders. Additionally, data released on Thursday showed that new claims for unemployment benefits in the U.S. reached an 11-month high last week. These reports raised concerns about the resilience of the U.S. economy, despite the Federal Reserve’s recent indication that an interest rate cut could be on the horizon as early as September.
Investor sentiment was further dampened by rising geopolitical tensions. The Israeli military reported on Thursday that Mohammed Deif, the head of Hamas’ military wing, was killed in an airstrike in Gaza last month. This news followed the death of Hamas’ political leader, Ismail Haniyeh, in Tehran.
In response, MSCI’s broadest index of Asia-Pacific shares excluding Japan fell by 0.8% in early trading, mirroring a significant selloff on Wall Street. U.S. stock futures also saw declines, with Nasdaq futures dropping 0.6% and S&P 500 futures falling 0.4%.
Economists at Wells Fargo commented, “The ISM report indicates that various measures of manufacturing activity have plunged to levels not seen since the early days of the pandemic. Most concerning is that this decline has not been accompanied by lower prices.”
In Asia, Japan’s Nikkei index experienced a sharp decline, falling 5% to dip below the 37,000 mark for the first time since April. This drop, potentially resulting in a weekly loss of over 3.5%, was influenced by the Japanese yen’s sharp appreciation following the Bank of Japan’s decision to raise interest rates to a 15-year high and scale back its extensive bond purchasing program.
The yen, bolstered by safe-haven buying, was trading at 149.13 per dollar, near a four-month peak and on track for a 3% weekly gain. The Swiss franc also gained, reaching its highest level since early February at 0.8720 per dollar.
Reflecting concerns about a U.S. economic slowdown, the 10-year Treasury yield fell to a six-month low of 3.9440% as investors flocked to these safe-haven bonds. The two-year yield, sensitive to short-term rate expectations, dropped to its lowest level since May 2023, at 4.1090%, before recovering slightly to 4.1215%.
Futures markets now imply a 29% chance of a 50-basis-point rate cut by the Fed in September. Attention is now on the upcoming U.S. nonfarm payrolls report, which will provide further insights into the labor market and overall economic health.
Chris Weston, Head of Research at Pepperstone, noted, “The market is increasingly adopting a view that negative news will adversely impact risky assets and sentiment. Poor U.S. job numbers will likely be poorly received.”
In other currency movements, the British pound fell 0.09% to $1.2724 after the Bank of England reduced interest rates from a 16-year high on Thursday. The Australian and New Zealand dollars, both sensitive to risk sentiment, dropped 0.2%.
Oil prices edged higher amid renewed concerns about supply disruptions due to escalating geopolitical tensions. Brent crude rose 0.4% to $79.83 per barrel, while U.S. crude increased 0.43% to $76.64 per barrel. Spot gold saw a modest gain of 0.2%, trading at $2,450.62 per ounce.
