ASX Futures were sitting 50 points, or 0.8 per cent, lower at 6133 on Sunday afternoon as the local market looked set to follow the northern hemisphere’s slide.
Markets had shown some confuson about what the US Federal Reserve’s decision of last Wednesday to remove all expectations of interest rate hikes in 2019 meant for the economic outlook, but investors responded firmly to Friday’s disappointing data, pushing the Dow Jones Industrial Average down 1.8 per cent. The S&P 500 slid 1.9 per cent and the Nasdaq Composite fell 2.5 per cent.
In Europe, the Euro Stoxx 50 fell 1.8 per cent, London’s FTSE 100 slid 2 per cent, as did France’s CAC 40 while Germany’s DAX declined 1.6 per cent.
“If everyone is selling off, the Aussie market will follow,” said Morphic Asset Management’s head of macro Geoff Wood, who added that the market could remain lower for some time. “The market is up 20 per cent from its lows and after these big rallies, you normally see a consolidation over a couple of months.”
Friday’s market slide began in Europe as weak manufacturing data from Germany pushed the country’s 10-year bond yields below zero for the first time since October 2016.
“Worrisomely, the German manufacturing PMI fell to a multi‑year low of 44.7 in March indicative of a deeper contraction in manufacturing activity,” said CBA senior currency strategist Elias Haddad.
“The Eurozone preliminary March PMIs suggest the economy lost momentum again. According to IHS Markit, manufacturers reported their steepest downturn for six years.”
Across the Atlantic, Markit’s purchasing managers index for US manufacturing unexpectedly fell to 52.5 in March, hitting its lowest level since June 2017 as both new orders and output softened.
The weak figures sparked recession fears in the US, as the yield on the 10-year Treasury fell below the 3-month yield for the first time since 2007.
“The inversion historically has not been a good sign for the economy going ahead,” QMA chief investment strategist Ed Keon told Bloomberg.
Despite concerns the US economy is slowing, indices on Wall Street remain near all-time highs, unemployment near record lows, real wages are increasing, oil prices are remaining low and interest rates are fuelling the economy with cheap money.
“US recession this year is not my base case, but the yield curve inversion is a reminder that central banks backing off from their tightening bias and the Fed’s quantitative tightening may be too late, as they may have already over-baked the cake,” Perpetual’s Mr Sherwood said.
Invesco chief global market strategist Kristina Hooper was also more optimistic on the outlook, saying a US recession wasn’t imminent.
“The Fed decision this week has created an environment for risk-taking. Risk assets should be resilient if the economic data remain solid,” she told Bloomberg. “I don’t think this is a cause for panic.”
The weak manufacturing data on Friday only reinforced the dovish position taken by the Federal Reserve last week, where it effectively ruled out any rate hikes in 2019.
“The FOMC have been cautious on the economic outlook and the need for any further tightening of policy,” Westpac senior economist Elliot Clarke noted on Friday. “At their March 2019 meeting, the committee formally confirmed this shift in stance, with the growth and employment forecasts lowered, and committee members taking a much more cautious approach to future rate hikes.”
While equity markets historically have been very receptive to such news, global stocks failed to take a strong lead from the dovish tone.
“Normally Fed days are good for stock markets but post the FOMC decision you had an attempt at a rally on the market but there was an initial lag,” said Morphic’s Mr Wood.
William McInnes covers markets from Sydney including editing the Markets Live blog.