Economic Upheaval: Global Markets React to Weak U.S. Factory Data

Asian shares and U.S. Treasury yields declined, while the Swiss franc and Japanese yen rose following weak U.S. factory data, indicating a worsening economic outlook. The U.S. ISM manufacturing report revealed it's at an eight-month low, causing broad market risk-off moves. Geopolitical tensions further impacted market sentiment.

Asian shares and U.S. Treasury yields slid as the Swiss franc and Japanese yen gained traction on safety bids after disappointing U.S. factory data worsened economic outlook fears on Friday.

A measure of U.S. manufacturing activity reached an eight-month low in July due to a slump in new orders. This, along with a rise in new unemployment benefit claims to an 11-month high, sparked broad market risk-off moves despite the Federal Reserve's rate cut indications for September.

Geopolitical tensions added to the negative sentiment, following the Israeli military's announcement that Hamas' military wing leader Mohammed Deif was killed in Gaza, shortly after political leader Ismail Haniyeh was killed in Tehran. Consequently, MSCI's broad Asia-Pacific index outside Japan dipped 0.8%, tracking Wall Street's selloff.

U.S. stock futures extended their decline, with Nasdaq futures dropping 0.6% and S&P 500 futures down 0.4%. Wells Fargo economists stated the manufacturing sector's gloom persisted without the benefit of lower prices.

In Asia, Japan's Nikkei plummeted 5%, falling below 37,000 for the first time since April, influenced by sharp yen gains post-BOJ's interest rate hike to a 15-year high. The yen's appreciation was fueled by safety flows, gaining 0.15% to 149.13 per dollar, eyeing a 3% weekly gain.

The Swiss franc also rose to its strongest level since February at 0.8720 per dollar. Reflecting U.S. economic slowdown concerns, the 10-year Treasury yield hit a six-month low at 3.9440%, attracting safe-haven investors. The two-year yield, indicating near-term rate expectations, fell to its lowest since May 2023, at 4.1090%, and was last seen at 4.1215%.

Futures suggest approximately a 29% probability of a 50-basis-point cut from the Fed in September. Market focus turns to Friday's U.S. nonfarm payrolls report for insights into labor market health and the broader economy.

Chris Weston, research head at Pepperstone, noted concern among Asia-based equity traders holding positions through the U.S. session amid potential Monday gaps, with the market perceiving bad news as detrimental to risky assets.

Among other currencies, sterling fell 0.09% to $1.2724 after the Bank of England cut rates. Risk-sensitive Australian and New Zealand dollars each declined 0.2%.

Oil prices rose on fears of supply disruptions due to escalating geopolitical tensions, with Brent up 0.4% to $79.83 a barrel and U.S. crude up 0.43% to $76.64 per barrel. Spot gold increased by 0.2% to $2,450.62 an ounce.

(Editing by Sam Holmes)