A poor manufacturing PMI reading, a soft ADP private payroll report, a potential non-deal Brexit and an impeachment drama worked together to pull equities lower this week, in light of deepened fears of a global recession and mounting trade risks.

The growing popularity of ETFs and index products in recent years is likely to play a crucial role in exacerbating a market decline, as their ‘basket’ character will force investors to dump whatever stocks have been included in their portfolio, with no differentiation. As ETFs play an ever bigger role, the market becomes more clustered and stocks tend to move in the same direction.

Nikkei 225 index opened 1.7% lower on Thursday, following a bloodbath US session last night. The US ADP report shows only 135k new jobs were added to the private employment market, falling short of the forecasted 140k according to Reuter’s polls. This brought the monthly average for 2019 to 145k, a sharp decline from 214k a year ago.

Weakness mainly came through the construction (+9k), manufacturing (+2k), natural resources and mining (-3k) sectors, whereas education and health service (+42k), trade, transportation and utilities (+28k), professional and business service (+20) leisure and hospitality (+18k) still registered rapid growth.

There seems to be some cracks forming in some parts of the US economy and also in investor confidence. The future’s market has started to price-in a higher chance of a Fed rate cut in the October and December meeting, standing at 77.5% and 88.8% respectively.

This led to the decline of the US dollar index for a third day and sent gold prices higher to above US$ 1,500 again. Crude oil prices, however, declined to two-month lows as the clear sign of a global manufacturing slowdown dampened the outlook of energy and raw material demand.

Asian markets are likely to get smashed today, but the downside for major Asian equities look limited compared to the downside of the US market. Major Asian markets like Shanghai, Hong Kong and Singapore are trading at a P/E ratio that is at least 1 standard deviation below their seven-year average. Relatively cheap valuation will help to cushion the downside to some extent.

Technically, the S&P 500 Index has come to an immediate support level of 2,888 points, breaking down below which will open the floor for more downside towards 2,820 points. Overall trend remains bearish in its 4-hour chart.

US SPX 500 – Cash (4hr)

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