Not a comfortable end to the week for many markets as ongoing concerns regarding China and emerging markets in general weigh on sentiment. This was pretty evident in stock markets yesterday, down 2% or more in Europe and the pattern has been repeated overnight, with markets in both Japan and China down by nearly 3%. The latest manufacturing PMI data for China, released overnight, added to the bearish tone, disappointing expectations for a modest recovery from last month’s 47.8 reading (above 50 generally indicating expansion). In currencies, the dollar was mostly weaker, with the single currency, Swiss franc and Japanese yen gaining the most. The Australian dollar was again unable to shake-off its associations with China, down below the 0.73 level on AUDUSD a couple of times over the past 24 hours. The fact that we are seeing another election in Greece next month is not a surprise, but was largely over-looked by markets against the turmoil being seen elsewhere.
This background makes it that bit less comfortable for the Fed when considering whether to raise interest rates next month, with the balance of probabilities now less than 50:50 as we discussed yesterday. The early focus in Europe this morning is with the advance release of PMI data, where early indications suggest weaker than expected numbers if the release from France is to be repeated. Other than that, we see CPI and retail sales data in Canada, where the Canadian dollar has also been under pressure and retaining the move above the 1.30 level on USDCAD. FX likely to be dominated by flight to safety and a dollar under pressure as Fed tightening expectations are further eroded.