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Major US stock indices fell significantly, as another disappointing report on the US reinforced concerns about the slowdown in the world's largest economy.

Report prepared by Automatic Data Processing Inc. (ADP) and Moody's research agency revealed that US private employers added 135,000 jobs in September, while economists had expected an increase of 140,000. In addition, the August increase was sharply revised to 157,000 from the 195,000 initially reported . Mark Zandi, chief economist at Moody's Analytics, noted that companies have become more cautious in hiring, especially small businesses, and if the business recedes further, unemployment will begin to rise.

The report was released the day after the publication of ISM data, indicating a decrease in activity in the US manufacturing sector to the lowest level in more than a decade. This worried investors, whose confidence in the strength of the US economy was one of the factors supporting the stock market this year.

The Department of Labor plans to release a more detailed monthly employment report on Friday, which includes both the public and private sectors. Non-farm employment is expected to increase by 145,000 jobs in September, after rising 130,000 jobs in August, while unemployment is expected to remain at 3.7%.

Almost all DOW components recorded a decrease (29 out of 30). Outsiders were shares of Walgreens Boots Alliance, Inc. (WBA; -3.46%). Only Johnson & Johnson shares (JNJ; + 1.42%) went up.

All S&P sectors completed trading in the red. The largest decline was shown in the base materials sector (-2.2%).

At the time of closing:

Dow 26,078.62 -494.42 -1.86%

S&P 500 2,887.61 -52.64  -1.79%

Nasdaq 100 7,785.25 -123.44 -1.56%

Deutsche Bank's analysts note that the warning signs for the U.S. economy that we got from the Chicago PMI data on Monday turned out to be correct with yesterday’s shocking ISM manufacturing print being the talk of the town in markets.

• “The headline was the decade-low September print of 47.8, a 1.3pt decline from August and also well below expectations for a 50.0 reading. In fact it was below even the lowest economist’s forecast on Bloomberg.
• The details were arguably even more concerning though. New orders (47.3 vs. 47.2 previously), employment (46.3 vs. 47.4) and production (47.3 vs. 49.5) all either remained soft or deteriorated further. Only 3 of the 18 industries in the survey reported growth, the lowest figure since 2009.
• In addition, the leading indicator new exports component slumped to 41.0. The last time it was lower was during the depths of the GFC in March 2009, and if we look at the full 380 months’ of history, this index has only been lower than it is right now on 6 occasions.”

The U.S. Energy Information Administration (EIA) revealed on Wednesday that crude inventories increased by 3.104 million barrels in the week ended September 27. Economists had forecast a gain of 2.000 million barrels.

At the same time, gasoline stocks declined by 0.228 million barrels, while analysts had expected an advance of 0.600 million barrels. Distillate stocks reduced by 2.418 million barrels, while analysts had forecast a decrease of 2.978 million barrels.

Meanwhile, oil production in the U.S. decreased by 100,000 barrels a day to 12.400 million barrels a day.

U.S. crude oil imports averaged 6.3 million barrels per day last week, down by 87,000 barrels per day from the previous week.

The UK government has published its Brexit proposals to the EU, including plans to replace the Irish backstop, the BBC reports.

• The plan would see Northern Ireland essentially stay in the European single market for goods through the creation of an "all-island regulatory zone".
• The Northern Ireland Assembly would have to approve the arrangements first and be able to vote every four years on whether to keep them.

Citibank told Reuters that UK Prime Minister Boris Johnson's Brexit proposals seem to fall fouls of established EU red lines.

• "We think the prospects for a deal continue to look weak. If a deal is not forthcoming, we expect an extension to be secured and a general election to follow subsequently."
• "Putting forward new plans at such a late stage, and on a ‘take it or leave it’ basis, sets up a clear blame-game in the event of an extension and a general election."

• Says he has not yet seen the UK's Brexit proposals 
• Adds that what they are hearing is not encouraging, would not be basis for a deal

Analysts at Danske Bank note that the euro area economy has been humming at two speeds since the beginning of the year - a swift service sector and a sluggish manufacturing sector, but September has marked this year's first month with a significant slacking in the previously fast-paced service sector activity, as the service PMIs fell to a year-low of 52.0 from 53.5 in August.

• “The slackening comes on the back of deteriorating new business, which furthermore means that new hiring has also been scaled back in the service sector. Hence, signs are growing that the transmission of the manufacturing malaise to the service sector has started, but a severe syndrome is not yet prevailing since the domestic demand indicators of our growth tracker are still in green.
• Patient zero in the euro area is still Germany and many economists (including Mario Draghi) are encouraging Germany to start rehabilitation by ramping up fiscal easing.”

U.S. stock-index futures fell on Wednesday, as an unexpected contraction in the U.S. manufacturing activity in September confirmed the country’s economy was impacted by a prolonged trade war between Washington and Beijing.

Global Stocks:

(company / ticker / price / change ($/%) / volume)

Analysts at Westpac note that the Bank of Canada (BoC) has sat on the sidelines for almost a year, their policy rate steady at 1.75% since late October 2018, having raised it +125bp in the prior fifteen months.

• “The Bank is wary about the global outlook and escalating trade tensions, their latest statement noting they will, “pay particular attention”. But the Bank has made no mention about the possibility of cutting rates, BoC officials taking comfort in rebounding domestic activity.
• Against that background, the BoC has struck a neutral tone noting that, "…the current degree of monetary policy stimulus remains appropriate".
• Markets have got the message loud and clear, pricing in just 14bp in BoC easing to mid-2020, a notable outlier vs peers.
• The outcome of the federal election (21 Oct) won’t materially alter the outlook though at the margin sentiment could see a bigger lift if the more business-friendly conservative opposition wins.
• The BoC is anticipating a growth moderation in H2 but activity is likely to hold near trend, leaving the BoC content to maintain a steady policy hand further still into 2020.”

 The employment report prepared by Automatic Data Processing Inc. (ADP) and Moody's Analytics showed on Wednesday the U.S. private employers added 135,000 jobs in September.

Economists had expected a gain of 140,000.

The increase for August was revised sharply down to 157,000 from the originally reported 195,000.

“The job market has shown signs of a slowdown,” noted Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “The average monthly job growth for the past three months is 145,000, down from 214,000 for the same time period last year.”

Meanwhile, Mark Zandi, chief economist of Moody’s Analytics, said, “Businesses have turned more cautious in their hiring. Small businesses have become especially hesitant. If businesses pull back any further, unemployment will begin to rise.”

UOB Group's analysts suggested in their Quarterly Global Outlook that USD is seen losing its shine versus its main rivals in the next months on the back of a persistent easing bias from the U.S. Federal Reserve.

• “Whilst Asian FX is expected to weaken further against the USD, we now see a constructive scenario for a weaker USD against most of G-10 majors spurred by aggressive Fed easing. We now expect 25bp rate-cut at each of the remaining three FOMC meetings for 2019 bringing the Fed Funds Target Rate to a range of 1.25%- 1.50%. If that comes to pass, the interest rate advantage that the USD currently enjoys over its G-10 peers will close significantly and structural USD longs set during Fed hiking cycle from end-2015 to end-2018 may start to get unwound.
• With intensifying discussions of a global recession and the resulting portfolio reallocation towards preparing for one, we expect the JPY to stay strong and update our view towards further strength towards 103/USD by mid-2020. Overall, investors are urged to hedge their JPY liabilities as the twin tail risks of US-China trade conflict and Brexit remain unresolved and tilted to the downside.
• … if the previous QE by the ECB from 2015-2018 was any guide, EUR/USD may even stabilize after bond purchases commence (“sell of rumor, buy on fact”). Coupled with a more aggressive easing profile by the Fed, we expect EUR/USD to gradually recover to 1.12 in 2Q20 and 1.14 in 3Q20.
• Overall, we maintain the view that the GBP/USD would stay depressed at 1.20 in the immediate two quarters until the fog of Brexit is lifted. Combining our negative GBP and positive JPY view, we expect GBP/JPY to drop further to 126 in Q120, near to its 2016’s flash crash lows of 121.60."

Analysts at TD Securities note that the UK’s construction PMI unexpectedly dropped to 43.3 in September (mkt 45.0), just slightly higher than the cyclical low of 43.1 that was reached in June.

• “Survey details showed that commercial real estate continues to be the worst-performing sub-sector, and mirroring the weakness in manufacturing employment that we saw in yesterday's PMI report, Markit noted that jobs were cut to the greatest extent since Dec 2010. There seem to be growing alarm bells around the UK's labour market, and we may see the unemployment rate start trending a bit higher over the next few months.”

Angelo Katsoras, an analyst at National Bank Financial (NBF) notes that a substantial capital flight combined with the risk of private companies suffering heavy losses on overseas investments prompted Chinese authorities, beginning in 2017, to implement strict capital controls in order to reduce and redirect outbound investments.

• “Another factor that has reduced outbound investment is that China’s continued push to have its firms invest abroad in strategic sectors such as IT, robotics and agriculture is being met with more and more resistance from countries not wanting to lose control of strategic assets.
• The fact that foreign companies are for the most part prevented from purchasing similar Chinese assets has only bolstered this resistance. Not surprisingly, all of these factors have caused overseas acquisitions by Chinese companies to plummet to $24.5 billion in the first half of 2019.
• According to Dealogic, this is down 42% from the same period a year earlier and represents less than 20% of the most recent peak reached in the first half of 2016. The decline includes a significant drop in real estate purchases. Chinese investors acquired a total of $15.7 billion worth of overseas real estate in 2018, down 63% from 2017.11 The decline in Chinese foreign direct investment has been particularly significant in the United States and Europe.”

The Mortgage Bankers Association (MBA) reported on Wednesday the mortgage application volume in the U.S. climbed 8.1 percent in the week ended September 27, following a 10.1 percent tumble in the previous week.

According to the report, refinance applications surged 14.2 percent, while applications to purchase a home rose 0.9 percent.

Meanwhile, the average fixed 30-year mortgage rate decreased to 3.99 percent from 4.02 percent.

“Although refinance activity slowed in September compared to August, the months together were the strongest since October 2016. The slight changes in rates are still causing large swings in refinance volume, and we expect this sensitivity to persist,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

• Parliament refuses to deliver Brexit, do anything  constructive or have an election
• We will work for a deal with our EU friends
• Things have not been made easier by the "surrender Bill" (Benn act)
• We will compromise and allow the UK - whole and entire - to withdraw from the EU, with control of our own trade policy from the start
  
• Let us be in no doubt that the alternative is a No-deal
• No deal is not an outcome we want, it is not an outcome we seek at all but it is an outcome for which we are read
• Only by delivering Brexit that we can address those who feel ignored and left behind

• An orderly withdrawal is preferable to a no-deal scenario
• We must have legally operable solution that meets all goals of the backstop to get a deal
• EC President Jean-Claude Juncker will be holding a phone call with UK Prime Minister Boris Johnson at 15:15 GMT today

In light of the recent price action, the UOB Group's FX strategists suggested USD/JPY is once again facing further consolidation.

• "24-hour view: We highlighted yesterday “the improved underlying tone could lead to USD testing the next resistance at 108.30”. We added, “a break of last month’s 108.47 peak is unlikely”. While our expectation was not wrong as USD subsequently touched 108.46, the sharp and swift sell-off from the high was unexpected. The decline appears to be running ahead of itself but with no sign of stabilization, USD could extend its decline to 107.50 (next support is at 107.25). Resistance is at 107.95 but only a move above 108.15 would indicate the current weakness has stabilized.
• Next 1-3 weeks: We indicated yesterday (01 Oct, spot at 108.10) that USD “could test the major 108.50 level” and added, “the prospect for a sustained rise above this level is not high”. While our view was not wrong, the rapid manner by which USD rose to 108.46 and the subsequent sharp sell-off was not exactly expected. Upward pressure has waned quickly and from here, USD has likely moved back into a consolidation phase. In other words, USD is likely to trade sideways and only a clear break out of the expected 107.00/108.50 range would suggest the start of a sustained directional move."

German Finance Minister Olaf Scholz said that Europe’s largest economy would be able to counter an economic crisis if there were one but added that he did not expect a downturn as bad as in 2008/2009.

“We are well prepared because we have decent financial resources so if there is an economic crisis, we can take countermeasures but at the moment we’re only seeing slower growth,” Scholz told.

He said if a crisis as serious as in 2008/2009 were to appear on the horizon, Germany would “be able to do everything that is necessary” but added that he did not foresee such a scenario, with forecasts pointing to the economy improving - albeit more slowly than had been previously hoped.

Deutsche Bank analysts point out that in the UK, Mr. Johnson will give a key speech today at the Conservative Party conference where more Brexit news will follow.

“It’s expected firm Brexit proposals will be sent to the EU soon after the conference ends - possibly within 24 hours. So a potentially big couple of days ahead. The overnight reporting suggested that he will offer a plan which will include “two borders for four years;” with a time-limited backstop for Northern Ireland that is separate from the UK. It is unlikely that the EU will agree to such a plan, which would require customs checks between Northern Ireland and the Republic of Ireland. The Irish finance minister has already been quoted as saying that if this is the plan then “that in itself is bad faith”. So today could be the beginning of the end for any hopes of a deal ahead of the EU council meeting in two weeks.”

The European Central Bank began its official transition to a new benchmark short-term interest rate Wednesday, as global regulators move away from tainted Libor gauges.

The new rate, known as ESTR, which reflects overnight borrowing costs of banks in the monetary bloc, fixed at -0.549% for Oct. 1, the central bank said on its website.

The shift comes as similar actions are underfoot in sterling and dollar markets after a rigging scandal with the London interbank offered rate undermined confidence in indexes used as benchmarks for roughly $370 trillion of financial products worldwide. In the euro area, regulators are trying to push market participants away from the traditional Euribor and Eonia measures.

By some measures, the euro area has lagged behind other regions in the shift from the much-maligned older benchmarks. U.S. companies have been selling debt linked to the new American reference rate for nearly a year and in the U.K., financial markets have begun to decisively migrate to a sterling overnight rate index.

The good news is that the move to ESTR may be helped by the ECB’s strategy for switching from the former benchmark rate. “The transition to ESTR should be pretty straightforward given Eonia will now be computed as a tracker off this new rate,” said Adam Kurpiel, a strategist at Societe Generale SA. “Euro money-market derivatives will also benefit from all the Eonia infrastructure. It should be much smoother than in the U.S. where new markets had to be created from scratch” for their new benchmark -- the secured overnight financing rate.

According to Reuters, Germany’s leading economic institutes downgraded their growth forecasts for this year and next, in response to weaker global manufacturing slowdown amid a trade war.

• Now expect the German economy to grow by 0.5% this year and 1.1% in 2020. This compared with their April estimates of 0.8% and 1.8% respectively.

• An economic crisis with a pronounced underutilization of the German economy is ... not in sight, although the cyclical downside risks are currently high.

• For 2021, the institutes predict a mild recovery with an economic expansion of 1.4%.

According to the report from IHS Markit/CIPS, the UK construction sector remained firmly stuck in a downturn at the end of the third quarter. Building activity fell at the second-fastest rate since April 2009, only narrowly outpaced by June's decline. A historically steep drop in new orders was also registered, while firms trimmed employment at the fastest rate since the end of 2010 due to unfavourable demand, client hesitancy and low confidence. Although there was a marginal pick-up in optimism, the level signalled by survey data was still historically weak.

The headline seasonally adjusted UK Construction Total Activity Index posted 43.3 in September, down from 45.0 recorded in August and thereby signalling a more severe downturn in building activity across the UK. Moreover, the deterioration was the second-strongest since April 2009 and broad-based across all three broad categories of construction work.

Looking ahead, UK construction firms were mildly optimistic that output volumes would pick up over the coming 12 months, although the level of business confidence was weak by historical standards. Competitive pressures, Brexit uncertainty and concerns towards the economy led to a subdued year-ahead outlook.

Standard Chartered analysts suggest that their China’s nowcasting model puts GDP growth at 5.7% y/y in July-August, decelerating from 6.2% in Q2.

“Industrial production (IP) growth averaged only 4.6% y/y in July and August, down from 5.6% in Q2. The slowdown reflects both lower demand and destocking by companies on the back of falling profits. In real terms, average retail sales growth edged down to 5.6% y/y in July-August from 6.4% in Q3, dragged down by the normalisation of car sales. Real fixed asset investment (FAI) growth also slowed from Q2 on weaker manufacturing investment. Elevated trade tensions continue to weigh on China’s trade performance, and we expect the contribution of net exports to GDP growth to decline in H2. We expect growth to have improved modestly in September. Early indicators suggest that production activity may have picked up. Infrastructure investment likely continued to recover, and the drag from car sales likely eased. We expect counter-cyclical measures to shore up the economy, with a focus on accelerating rural consumer spending, old town renovation, and construction of logistics and information technology networks.”

Boris Johnson is poised to issue an ultimatum to the European Union on Wednesday: negotiate Brexit on his terms within the next nine days, or face a no-deal divorce. A key EU player has already rejected the prime minister’s plan.

On Wednesday, Johnson will address his Conservative Party’s annual conference in Manchester, England, and his office said he would present a “fair and reasonable compromise” offer to the EU. He will say it is now vital to deliver on the decision of the British people to leave the EU in a referendum in 2016.

“After three and a half years people are beginning to feel that they are being taken for fools,” Johnson will say. “They are beginning to suspect that there are forces in this country that simply don’t want Brexit delivered at all.”

If Brexit talks collapse, the U.K. will be on course to leave the bloc without an agreement. Johnson is vowing to defy efforts by the British Parliament to prevent a no-deal exit. His office said on Tuesday that he would never negotiate the extension to EU membership that new legislation demands. If he can’t get a deal and he doesn’t seek a delay, he will probably find himself fighting members of parliament in court -- and could even be ousted. “The prime minister will in no circumstances negotiate a delay,” his office said.

Deutsche Bank analysts note that ECB’s outgoing President Draghi spoke again about the need for fiscal support.

“Bundesbank President Weidmann pushed back against the Draghi’s recent call for unanimity. Last week, Draghi had said in testimony that “the form in which dissent is made known is very important (…) in order not to undermine the effectiveness of our decisions.” Weidmann yesterday criticised that argument, albeit without singling Draghi out by name, saying that “intensive discussions” regarding policy, including QE, are “absolutely necessary.” Incoming President Lagarde will have her hands full when she inherits the Presidency next month.”

Billionaire hedge fund manager Ray Dalio said the White House’s deliberation on a block on U.S. investments in China made him wonder if bigger moves are on the way.

Dalio, founder of the world’s largest hedge fund, said that President Donald Trump could use special emergency powers like the freezing of Japanese assets and embargoing of oil to Japan in the 1940s.

“Regarding the capital and currency wars, the ability of the US president to unilaterally cut off capital flows to China and also freeze payments on the debts owed to China and also use sanctions to inhibit non-American financial transactions with China must be considered as possibilities,” Dalio, the co-chairman of Bridgewater Associates, said.

“That’s why the proposed step of limiting American portfolio investments in China makes me both think about the implications of this step and wonder if it is an inching toward bigger moves,” he added.

European companies are heading for their worst quarterly earnings in three years as revenue drops for the first time since early 2018, according to the latest Refinitiv data, underscoring concerns about Europe Inc’s deteriorating health.

Companies listed on the STOXX 600 regional index are expected to report a 2.2% drop in third-quarter EPS, worse than the 1.9% drop expected a week ago and the biggest quarterly fall since Q3 2016, according to I/B/E/S Refinitiv.

Consensus now calls for a drop in revenue of 0.3% in the quarter, which would be the first since Q1 2018, but slightly better than the 0.4% fall expected last week.

According to the report from Federal Statistical Office, the consumer price index (CPI) fell by 0.1% in September 2019 compared with the previous month, reaching 102.0 points (December 2015 = 100). Economists had expected a 0.1% increase. Inflation was +0.1% compared with the same month of the previous year. Economists had expected a 0.3% increase.

The decrease of 0.1% compared with the previous month can be explained by several factors including falling prices for foreign package holidays and petrol. The prices of airfares and hotel accommodation also declined. In contrast, prices for clothing and heating oil increased.

Danske Bank analysts are looking out for the US ADP jobs report to be the market mover, which may attract some attention (despite its poor forecasting ability) given the weak ISM manufacturing report yesterday.

“We have a below-consensus forecast for non-farm payrolls (Friday). Also look out for Fed comments today, not least with NY Fed President Williams speaking this afternoon. Today is the last day of the Conservative Party Conference. With the leaking of PM Johnson's Brexit plan (see below), the next key thing is the response from the EU. Yesterday we hosted a conference call on the global recession risk.”

Japanese firms' inflation expectations held steady in the third quarter, the Tankan summary of "Inflation Outlook of Enterprises" from Bank of Japan showed.

Companies expect annual inflation of 0.9% in the year ahead, unchanged from the previous outlook. Similarly, the three-year ahead inflation is seen at 1%, the same rate as estimated in June. The projection for next five years was retained at 1.1%.

The central bank aims at achieving price stability of 2% since 2013. Although the bank unveiled various quantitative and qualitative easing, inflation still remains well below the target.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1102 (2791)

$1.1057 (1266)

$1.1022 (1814)

Price at time of writing this review: $1.0934

Support levels (open interest**, contracts):

$1.0897 (2171)

$1.0849 (2011)

$1.0800 (552)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date October, 4 is 92267 contracts (according to data from October, 1) with the maximum number of contracts with strike price $1,1050 (6616);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2462 (958)

$1.2421 (953)

$1.2388 (693)

Price at time of writing this review: $1.2283

Support levels (open interest**, contracts):

$1.2233 (1156)

$1.2191 (1177)

$1.2145 (1152)

Comments:

- Overall open interest on the CALL options with the expiration date October, 4 is 17616 contracts, with the maximum number of contracts with strike price $1,2500 (1759);

- Overall open interest on the PUT options with the expiration date October, 4 is 20136 contracts, with the maximum number of contracts with strike price $1,1900 (1315);

- The ratio of PUT/CALL was 1.14 versus 1.11 from the previous trading day according to data from October, 1

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.