Risk On again after Strong ISM Manufacturing

Risk sentiments were given a strong boost today after unexpected improvement in the ISM manufacturing index. The data overshadowed poor ADP employment report and sent equities sharply higher. DOW closed up 2.54% at 10269.47, close to the intraday high. Dollar has been under much pressure today, in particular against commodity currencies. Yen and Swissy were also sent lower following as risk was turned on again. Gold, also tumbled from intraday high of 1256.6 to below 1250 level.

The ISM manufacturing index unexpectedly improved from 55.5 to 56.3 in August, comparing with expectation of a drop to 53. Improvements are shown in most components. In particular, employment component rose to 60.4, which is the first time the reading breached 60 since May 2004. Production was also strong by climbing to 59.9. Price paid rose to 61.5. The data offset the impact from disappointing ADP employment report, which showed -10k contraction in August.

Sterling was noticeably lower against Euro today after release of much weaker than expected PMI manufacturing. The PMI data dropped sharply from a revised 56.9 to 54.3 in August versus consensus of 54.3. The data suggests that manufacturing sector in UK is slowing much quicker than market thought and dampens the outlook for recovery in the second half. This is also in contrast to Eurozone PMI which was revised slightly up to 55.1 in AUgust. Swiss SVEM PMI dropped sharply from 66.9 to 61.4 in August.

Aussie continued to be the strongest currency today as boosted by strong GDP data from Australia as well as solid data from China. Australia Q2 GDP rose 1.2% qoq, 3.3% yoy, easily beat expectation of 0.9% qoq, 2.8% yoy. China. PMI manufacturing rose slightly more than expected to 51.7 in August while HSBC manufacturing PMI also rose back above 50 to 51.9.

The strength of today's rally in stocks and the steepness in dollar decline are raising some doubts that markets sentiments have turned and risk is back on. Note that the markets will still need to face tough test of Non-farm payroll report on Friday. But caution should be noted in some key near term levels in the financial markets. That will include 81.92 support in dollar index, 1.2921 resistance in EUR/USD, and 10480 in DOW. We're still favoring more risk aversion for the moment and favor an eventual rally resumption in dollar but will probably change our view if these levels are broken decisively.