Global stocks tumbled on Wednesday, as a drop in European markets followed a broad sell-off across Asia, as rising pressure on emerging markets intensified concerns of contagion and spillover into developed markets, leading to a sea of red in world stocks.

A day after emerging market currencies tumbled, it was the stock market’s turn in the hot seat, with shares sliding from Japan to Australia, and were crushed in Indonesia, where the nation’s benchmark lost almost 4%. Meanwhile, with no let-up in trade tensions near and new $200bn in US tariffs against China likely to be slapped as soon as tomorrow, the dollar strengthened for a fifth session and commodities slipped, led by oil, while the 10-year Treasury yield eased back to 2.89%.

At the same time, with the Fed showing no signs of slowing its rate hikes, investors are turning ever more cautious on emerging markets. Traders were focused on turmoil in developing nations wondering just how high rates will reach to contain the currency selloff, how acute the resulting economic slowdown will be and whether the volatility will spill into developed markets. Overnight, inflation in the Philippines exceeded 6% for the first time in nine years, joining Turkey and Argentina as another developing economy with soaring prices.

Predictably, the ongoing rout in emerging markets has not only not showed any signs of letting up, but accelerated overnight, with most currencies around the globe sliding against the soaring dollar, while the MSCI index of emerging market stocks heading toward a bear market.

Of the 24 most traded EM currencies only the Mexican Peso (+1.44%) is up YTD. In fact 4 have weakened between 10-20% (Indian Rupee, Chilean Peso, Russian Ruble and South African Rand), one between 20-40% (Brazilian Real) and two more than 40% (Turkish Lira, Argentine Peso).

What was initially an “idiosyncratic” rout in Turkey and Argentina, has since spilled to Brazil, Russia, and overnight slammed South Africa, Indonesia and the Philippines.

The negative tone was set Tuesday by the US ISM report, which showed an unexpected surge in US production that boosted the odds of more rate hikes and a strengthening dollar, while South African entered into a recession in the second quarter. As a result, South African bonds led the sell-off in fixed income as the rand slid to its lowest level in more than two years.

The EM selloff shifted from FX to equities, and the MSCI Emerging Markets Index of shares dropped for a sixth day, set for its steepest slide in three weeks.  The emerging-market currency index fell to the lowest level in 16 month, led for a second day by South Africa’s rand.

Worst-hit was Indonesia, where shares tumbled the most in three years amid concern the depreciating rupiah will lead to more rate hikes and higher corporate borrowing costs. Indonesian stocks sank for a fifth day as central bankers attempted to support the rupiah through measures including interest-rate hikes that threaten to slow Southeast Asia’s biggest economy. Meanwhile, the Indonesia Rupee hit another record low against the dollar.

Shares in the Philippines extended losses after a report showed inflation prompted by the sliding currency, surged past 6% last month, foreshadowing further rate hikes.

Elsewhere in Asia, markets traded lower across the board amid ongoing trade uncertainty and ahead of the looming risk events. ASX 200 (-1.0%) declined from the open with broad weakness across its sectors and with firm Q2 GDP data failing to underpin sentiment as the damage had already been done, while Nikkei 225 (-0.5%) was subdued following a destructive and deadly Typhoon which was the strongest to hit Japan in 25 years. Hang Seng (-2.6%) and Shanghai Comp. (-1.7%) were also negative on trade-related jitters as the deadline regarding potential US tariffs on USD 200bln of Chinese goods approaches and following disappointing Chinese Caixin Services and Composite PMI data in which the former posted a 10-month low.

Meanwhile, worries remain that Turkey’s central bank may not do enough at its policy meeting next week to shore up the weakening lira, although for the time being at least the TRY’s volatility has been contained. At the same time, Argentina’s economic outlook has deteriorated even as its officials negotiate with the IMF for accelerated aid. And Russia’s central bank Governor Elvira Nabiullina has begun talking of reasons to raise rates at a meeting next week.

“King dollar” was the main theme in currencies for another day with demand for long exposure in spot and options markets alike. The yen and the Swiss franc stayed in a tighter range than Tuesday as risk-off gained traction with Treasuries bid and a commodity gauge at a three-week low. The pound stayed near day lows even after a slight beat in PMI data while the loonie was little changed before the Bank of Canada rate decision.

The EM contagion has started to make headway into European markets, with the Stoxx 600 dropping as much as 0.9%, flirting with the lowest level in three months. The drop lead by Technology (SX8P -1.8%), Food & Beverages (SX3P -1.6%) and Personal Goods (SXQP -1.5%), while Banks (SX7E little changed) outperformed the broader market. Europe’s mining stocks – the Stoxx 600 basic resources index – dropped as much as 1.3%, flirting with the year lows hit on Aug. 17.

According to Bloomberg, two separate market drivers set the European session, on one hand the rising EM pressure continues to drive cross asset risk-off moves while Italian assets are well supported by further positive budget related comments as the ruling coalition vowed not to take the budget deficit above 2%, a number which changes by the day if not the hour. Italy’s Deputy PM Di Maio said budget will keep accounts in order but will be courageous, adding the government has every intention to last a long time. Di Maio added he cannot say if the 2019 budget deficit will be about 2% of GDP adding the deficit level is not part of today’s talks.

“It has to get a lot worse before it gets better,” Kay Van-Petersen, global macro strategist at Saxo Capital Markets in Singapore, told Bloomberg Television. “Before people talk about structurally buying EM you need to get some kind of comfort on the end of U.S. dollar strength and the end of the Fed tightening and I still think that plays out for a lot longer.”

“This has become now increasingly an issue which is no longer just about EM fundamentals,” Sameer Goel, head of macro strategy for Asia at Deutsche Bank AG in Singapore, said in a Bloomberg TV interview with David Ingles. It’s “increasingly about contagion, which largely happens because of cross-holdings and the pressure of redemptions.”

“Investors have become more selective, and countries with negative news such as weak economic growth, weak external balances and high inflation face stronger sell-offs, ”said Koji Fukaya, chief executive officer at FPG Securities Co. in Tokyo.

In Brexit-related news, EU’s Barnier reportedly deemed PM May’s Chequers plan as unacceptable in a meeting with the Brexit select committee. Instead the EU has urged PM May to adopt a Canada-style deal favoured by former Foreign Minister Johnson. UK’s Cabinet Office Minister Lidington says the Irish border is the only outstanding Brexit issue; adding UK PM May is very committed to a Chequers deal. Merkel’s CSU allies say in a draft document they want a close partnership with the UK post-Brexit; adding they reject a hard Brexit.

In other markets, gold climbed – somewhat surprisingly alongside the stronger dollar – while WTI oil futures dropped in the context of a strong dollar and a potential build at the Cushing, Oklahoma, storage hub.

Expected data include mortgage applications and trade balance. HD Supply, Couche-Tard, and DocuSign are among companies reporting earnings.

Market Snapshot

• S&P 500 futures down 0.4% to 2,888.00
• STOXX Europe 600 down 0.7% to 377.28
• MXAP down 1.4% to 161.55
• MXAPJ down 1.8% to 521.12
• Nikkei down 0.5% to 22,580.83
• Topix down 0.8% to 1,704.96
• Hang Seng Index down 2.6% to 27,243.85
• Shanghai Composite down 1.7% to 2,704.34
• Sensex down 1% to 37,780.71
• Australia S&P/ASX 200 down 1% to 6,230.45
• Kospi down 1% to 2,291.77
• German 10Y yield rose 0.6 bps to 0.363%
• Euro down 0.1% to $1.1567
• Italian 10Y yield fell 14.2 bps to 2.746%
• Spanish 10Y yield fell 0.6 bps to 1.423%
• Brent futures down 0.7% to $77.60/bbl
• Gold spot up 0.3% to $1,195.03
• U.S. Dollar Index little changed at 95.48

Top Overnight News from Bloomberg

• President Donald Trump is asking advisers whether it would be good politics to provoke an October government shutdown fight over money for his border wall, even though Republicans in Congress say a closure before the midterm elections in November would backfire
• European Union officials are exploring how to unlock a wider Brexit deal by making the so-called Irish border backstop more palatable to the U.K., according to a person familiar with the deliberations
• Austria’s new government said it’ll bid for a seat at the European Central Bank’s top table next year as euro-area nations jostle for roles in a shake-up of key monetary and political posts
• Manfred Weber, head of the European People’s Party caucus in the European Parliament, announced Wednesday he is running to replace Jean-Claude Juncker as European Commission president in elections next year
• IMF Managing Director Christine Lagarde said Tuesday evening that IMF officials “made progress” with Argentine leaders seeking to reform the $50 billion credit line agreed upon in June following a sharp selloff in the peso last month
• Europe’s high-yield market is braced for a post-summer rush of new bond sales just as talk of a downturn in the credit cycle gathers pace
• Corporate issuers may start turning to the green-bond market in search of something more than environmental kudos — volatility-proof funding
• Italian Deputy PM Salvini reiterates promise to respect all EU restrictions on budget; working on three-year time frame and will not enact all promises immediately; reports that 2019 budget deficit is seen “around” 2% and proposed flat tax will be postponed
• European Aug. Service PMIs: Spain 52.7 vs 52.0 est; Italy 52.6 vs 53.1 est; France 55.4 vs 55.7 est; Germany 55.0 vs 55.2 est; Eurozone 54.4 vs 54.4 est; U.K. 54.3 vs 53.9 est; Markit note worryingly unbalanced growth with Germany and France solid but Italy and Spain growing sharply slower
• Fed’s Kashkari: various threats to U.S. expansion such as EM weakness, trade battles and Fed hiking too quickly; does not see any indication that U.S. is running above potential
• Politico: U.S. Trade Representative Lighthizer and EU Commissioner Malmstrom will discuss scope of a transatlantic trade deal on Monday Sept. 10, according to people familiar
• BOJ judges its recent YYC adjustments to be working well; not ruling out another change if 10y tests 0.2% and the market function fails to improve, according to people familiar
• China Aug. Caixin Services PMI 51.5 vs 52.6 est.

Asian equity markets traded lower across the board after the Labor Day hangover on Wall St amid ongoing trade uncertainty and ahead of the looming risk events, although the US majors finished off worst levels and Amazon briefly  entered the USD 1tln club. ASX 200 (-1.0%) declined from the open with broad weakness across its sectors and with firm Q2 GDP data failing to underpin sentiment as the damage had already been done, while Nikkei 225 (-0.5%) was subdued following a destructive and deadly Typhoon which was the strongest to hit Japan in 25 years. Hang Seng (-2.6%) and Shanghai Comp. (-1.7%) were also negative on trade-related jitters as the deadline regarding potential US tariffs on USD 200bln of Chinese goods approaches and following disappointing Chinese Caixin Services and Composite PMI data in which the former posted a 10-month low. Finally, 10yr JGBs saw mild gains amid the backdrop of the widespread risk-averse tone, although price action was relatively muted and stuck within a tight range despite stronger results at this month’s 10yr JGB auction.

Top Asian News

• BOJ Is Said to See Adjustments Working, Content With Yield Range
• Bank Indonesia to Take Pre-emptive Steps, Warjiyo Says
• Iyer Goes Bollywood to Appeal to Central Bank on Yield Surge
• Indonesia’s Markets Get Hammered by Emerging-Market Contagion

European equities trade on the backfoot (with the exception of the FTSE MIB) as the Euro stoxx 50 index falls over 1%. Sectors are mostly experiencing broad-based losses while financial names are outperforming its peers as Italian banks provide some support to the sector on the back of BTP price action (Italian Banking Index +2.6%). In terms of individual stocks, JC  Decaux (+6.6%) rose to the top if the Stoxx 600 on the back of an upgrade, while heavyweight Bayer (-1.7%) pressures  Germany’s DAX 30 following uninspiring earnings.

Top European News

• Euro Businesses Show Warning Signs Amid Solid Economic Expansion
• Bahrain Investment Firm Buys Swiss Bank Stake in Europe Push
• Ex-BOE Governor King Attacks Government’s Brexit ‘Incompetence’
• EU Said to Explore Irish Backstop Options to Help May on Brexit

In FX, the focus again was on EM, where amidst more widespread depreciation across the region (and not just contained to currencies), the Zar continues to underperform and extend losses in wake of the ‘unexpected’ Q2 GDP contraction that consigned SA to a first half 2018 recession. Moreover, August’s PMI sank further below the 50.0 threshold to flag ongoing negative economic activity, and the Rand still has next month’s budget update to contend with. Usd/Zar has been just over 15.6900, but currently off worst levels around 15.6000, while the Rub, Mxn and Try also remain on the back foot, with the Cnh retreating as well after recent relative stability and no doubt eyeing the looming threat of additional US import tariffs.  DXY -The index remains firmly above recent near 95.000 lows and mainly towards the top of a 95.275-675 range, with broad gains vs almost all rivals, as noted above. GBP – The Pound is lagging G10 counterparts even though the UK services PMI broke the run of disappointing surveys with an unexpected beat vs consensus, with Cable down through 1.2800 again and Eur/Gbp firmly over 0.9000 to retest key chart resistance. The rationale, more reports that chief EU Brexit negotiator Barnier flatly rejects the Chequers White Paper that UK PM May and Raab are resolutely sticking to.

In commodities, WTI and Brent futures retreated to below 69.00/bbl and USD 77.50/bbl levels respectively following yesterday’s bull run. The Gulf of Mexico has been very much in theme recently, in terms of the latest updates, the NHC stated Storm Gordan is moving farther inland but is likely to weaken to a tropical depression later this morning, as a result WTI and Brent may be unwinding some risk premium accumulated from the past couple of days. Hurricane Florance is a little stronger and moving over the open Atlantic, while Hurricane Olivia has weakened slightly, ableit remains a category 3 hurricane. OPEC Secretary General Barkindo emerged this morning, noting the world will attain 100mln BPD of consumption this later this year; adding this is “much sooner” than expected. Furthermore, Lukoil VP Fundun stated Russian oil production has nearly peaked. Traders will be keeping a close eye on any development at the Gulf of Mexico, also of note: the API crude inventories numbers are to be released later today. In the metals complex, gold has found mild reprieve after losing the USD 1200/oz level yesterday while copper is relatively uneventful. Elsewhere, according to the City Environmental Watchdog, China’s top steel-making city, Tangshan will extend summer output cuts across the steel, coke and power sectors into September.

On today’s calendar there will be a bit of focus on the July trade balance reading. Meanwhile NY Fed President John Williams, Minneapolis Fed President Neel Kashkari, and Atlanta Fed  President Raphael Bostic are all due to speak at separate events. Also potentially worth keeping an eye on will be the Congressional testimony by executives from Twitter, Facebook and Google on Russia’s involvement in the US election.

US Event Calendar

• 7am: MBA Mortgage Applications, prior -1.7%
• 8:30am: Trade Balance, est. $50.2b deficit, prior $46.3b deficit

DB’s Jim Reid concludes the overnight wrap

EM investors could be excused for having tears in their eyes at the moment with September carrying on the trends of August. The other main story of August – namely Italy – did see positive price action yesterday though, as the endless budget second guessing edged towards the less extreme side. On the EM front, we saw another turbulent day for currencies with South Africa adding to the long list of issues following a second negative quarterly GDP print (-0.7% qoq vs. +0.6% expected) pushing the country into its first recession since 2009.

More on that shortly but the end story for EM FX (-0.65%) was a tenth decline in the last twelve sessions. The South African Rand (-3.16%) led losses and fell to the weakest since June 2016. The Argentine Peso (-1.20%) hit a new all-time low while the Turkish Lira (-0.53%) was weaker for the sixth time in the last seven sessions. Of the 24 most traded EM currencies only the Mexican Peso (+1.44%) is up YTD. In fact 4 have weakened between 10-20% (Indian Rupee, Chilean Peso, Russian Ruble and South African Rand), one between 20-40% (Brazilian Real) and two more than 40% (Turkish Lira, Argentine Peso).

European markets seemed to get swept up in the risk-off emanating from the EM moves. The Stoxx 600 (-0.70%), DAX (-1.10%) and CAC (-1.31%) all fell sharply. The exception was Italy though where the FTSE MIB (+1.01%) climbed for the second successive session along with 10 year BTPs rallying 14.7bps. Headlines trickled in all day with party leaders from the League meeting in Rome with Ansa reporting that they repeated a pledge to “respect EU rules”. However late in the day headlines hit the wires suggesting that Salvini was considering implementing a government programme for the budget over 5 years which, if true, would imply a lot more time for fiscal manoeuvring. At the same time Reuters also reported that the League was targeting a deficit “slightly above 2%”. We’ve lost count of the number of ‘targets’ that now must be out there, but our Italy economists put out this helpful overview of the situation last night

Anyway, as we have come to expect, the US equity market largely ignored most of the above – despite a dip at the open – and in the end although slightly lower it outperformed all other markets (with the exception of Italy). The S&P 500 finished last night -0.17% and NASDAQ -0.23%. Possibly the higher rates and stronger dollar (more below) weighed a little on equities, though this combination was positive for US banks which led gains and closed +0.54%. Amazon also joined Apple in briefly passing the $1tn market cap mark, though with a slightly different price-to-earnings ratio of approximately 200x compared to Apple’s 20x.

Asia appears to be following Europe and EM rather than the US overnight with heavy falls across most bourses. Indeed the Hang Seng (-1.65%), ASX (-0.94%) and Shanghai Comp (-0.92%) have seen the biggest moves while the Nikkei (-0.34%) and Kospi (-0.21%) are also lower. The main stock market in Indonesia is also -3.25% with the Indonesian Rupiah now at the weakest since 1991. It’s hard to ignore the EM data which is coming out at the moment either with the most notable overnight print being Philippines CPI for August which printed at a much higher than expected 6.4% (vs. 5.9% expected) and the highest since 2009. Meanwhile China’s Caixin services PMI also surprised but this time to the downside with the August reading falling 1.3pts to 51.5 (vs. 52.6 expected).

Back to yesterday, if EM FX wasn’t already on the ropes then the knockout blow appeared to come in the afternoon in the form of a bumper ISM manufacturing report across the pond which seemingly helped to contribute to concerns for EM that the Fed and the Dollar strength wouldn’t stop soon. The 61.3 print for August smashed expectations for 57.6 and also represented a jump of 3.2pts from July. That’s the highest reading since 2004, near the highest in 35 years and the biggest one month jump since 2010. New orders (65.1) was the highest since January, employment (58.5) the highest since February and production (63.3) the highest since January. So broad-based strength. Prices paid (72.1) also came in above expectations. Prior to this the manufacturing PMI was also revised up, albeit modestly, by 0.2pts to 54.7, though we certainly put more emphasis on the ISM given its stronger historical track record at predicting growth. Qualitatively, the report said “almost two-thirds (64%) of companies reporting higher input prices explicitly blamed tariffs,” and with the US set to impose another round of tariffs on $200bn of Chinese imports as soon as this week, this issue will continue to dominate headlines. The Atlanta Fed’s Q3 GDP tracker ticked up 0.6pp to 4.7%, largely due to a higher forecast for business fixed investment. DB’s survey tracker ticked up to 3.4%, but we maintain our official forecast for 3.1% GDP growth this quarter.

Treasuries, which in fairness were already a bit weak going into the data, soldoff a bit more post the report and by the close last night 10y yields had ended 3.8bps higher at 2.899%. The 2s10s curve also steepened 1bp and at 24bps is about 5.5bps off the lows from last month. Bond markets across Europe – with the exception of the periphery – were also a bit weaker with Bunds 2.3bps higher in yield. Meanwhile the Dollar index ended up last night +0.31%.

Coming back to currencies it was another weaker day for Sterling yesterday with the Pound edging down another -0.11% versus the Dollar to take the twoday loss to -0.80%. After the fallout from the Brexit rhetoric over the weekend, a Guardian article from Monday night quoting Tory MP Jacob Rees-Mogg and EU Chief Brexit Negotiator Michel Barnier as bonding over a shared assessment that the Chequers plan is “complete rubbish” gained a bit of early attention. Adding to the pain was a much softer than expected August construction PMI (52.9 vs. 54.9 expected). Later in the day BoE Governor Carney’s testimony was more of a  nonevent for markets but the main takeaways were that that Carney may well be open to staying on beyond his current term, more rate hikes are likely needed if the UK economy stays on the current path and the BoE is, unsurprisingly, making preparations for a no-deal Brexit but this is not the BoE’s base case.

In terms of what to look forward to today, this morning we’ll also get the remaining August services and composite PMIs in Europe and the UK as well as July retail sales data for the Euro area. In the US there will be a bit of focus on the July trade balance reading. Meanwhile NY Fed President John Williams, Minneapolis Fed President Neel Kashkari, and Atlanta Fed  President Raphael Bostic are all due to speak at separate events. Also potentially worth keeping an eye on will be the Congressional testimony by executives from Twitter, Facebook and Google on Russia’s involvement in the US election.