Nasdaq Plunges Amid ISM Jitters

Major US stock indices declined substantially on Tuesday, 3 September, driven by a broader market sell-off triggered by tepid US manufacturing data. Cooling enthusiasm around artificial intelligence (AI) stocks saw AI darling Nvidia (NVDA) fall approximately 10% as scepticism about the sector’s growth sustainability continued to rise in early September. 

The S&P 500 declined by 1.4%, the Dow Jones (USA 30) fell by 1.1%, and the tech-heavy  Nasdaq (NDAQ) tumbled by 2.3% as some traders switched to more defensive sectors. The weak manufacturing data led to declines in energy stocks, which was weighed down by a decline in oil futures.

Despite recent data pointing to economic strength in the US, there are concerns about the potential for a hard landing, which is seen as contingent on upcoming labour market data. This is especially true as there is debate on whether the Federal Reserve cutting interest rates in September is timely enough to avert a recession. Let’s take a close look:

AI Stocks Pressured by Weak Manufacturing

Despite the ISM Manufacturing PMI report for August showing a slight rise from 46.8 to 47.2 in July, it fell short of expectations of 47.5, prompting some investors to shift towards defensive assets. In addition, the New Orders index fell from 47.4 in July to 44.6 and Production from 45.9 to 44.8 for the same period, suggesting ongoing demand challenges. 

On the other hand, the employment component rose from 43.4 in July to 46, with a rise in Backlog Orders from 41.7 to 43.6. Prices Paid also rose from 52.5 expected to 54, suggesting persistent inflationary pressures, complicating the Fed’s path to normalisation. However, as market participants returned from the Labour Day weekend, expectations of increased volatility led to profit-taking and repositioning, with investors taking a more cautious approach following recent unemployment data.

Recession fears have been heightened recently following the unemployment rate rising to 4.3%, which triggered the Sahm Rule. Tuesday’s PMI contributed to the decline in the Nasdaq as investors remained wary of Nvidia’s recent earnings despite beating analysts' expectations. Taiwan Semiconductor (TSMC) and Advanced Micro Devices (AMD) also declined, and investors monitor upcoming earnings from Broadcom (AVGO). 

Besides the ISM data in the US, crude oil (CL) prices witnessed substantial losses on Tuesday following Bloomberg reports of a potential resolution of Lybia’s bank crisis. This crisis has led to a disruption in oil production of approximately 660,000 barrels per day, which weighed on economic slowdown fears.

While the market-implied probability of a rate cut slightly increased, reflecting ongoing uncertainty about the Fed's next steps amid mixed economic signals, some investors sought safe havens in Consumer Staples, Real Estate and Utilities.

Mixed Market Outlook

The weak ISM manufacturing report may have rekindled concerns about an economic slowdown in the US, leaving investors focused on upcoming employment data to gauge the next Fed moves on interest rates. If economic data continues to disappoint, the market's expectation of rate cuts might increase.

Moreover, across the pond in China, the ongoing property market issues indicate persistent weakness, translating into economic instability for households and posing a significant economic headwind. This is while China attempts to stabilise its currency through lower interest rates, creating confusion and uncertainty in the market as Beijing battles between currency appreciation and economic growth priorities.

On the other hand, however, the S&P 500 is up around 18% in 2024, fuelled by optimism around the Fed’s interest rate cuts. US households have increased stock allocations to 42% of their total assets, the highest level since 1952, while professionals added to new bullish bets on the index to levels not seen since 2020. But despite the bullish sentiment, some investors remain cautious due to historical volatility in September and potential turbulence around the presidential election.

September has been a historically volatile month, and this year is exacerbated by the uncertainty surrounding the upcoming US presidential election in November, with investors expected to remain cautious. However, history cannot dictate the future or indicate future outcomes. (Source: Reuters)

Conclusion

Investors may be bracing for continued volatility in the Nasdaq ahead of the upcoming employment figures this week. With AI leading the pact due to weak ISM manufacturing data in the US, some investors roasted from Nasdaq towards defensive plays to navigate rising September volatility.

Amid a substantial drop led by AI darling Nvidia, the US Tech index’s future may be hinging on whether economic uncertainty persists and leads to fears of a hard landing or cools recent declines.