FTSE drops amid manufacturing contraction

• US dollar takes a pounding 

• RBA cuts rates amid slowing inflation 

• UK manufacturing slides into contraction

The FTSE is playing catch up this morning, as sellers dominate the early trade, pushing the index to a three-week low. The FX markets are taking centre stage today, as incessant US dollar selling has brought about an 18-month low in USD/JPY, eight-month high in EUR/USD and four-month high in GBP/USD. With IG clients currently seeing a 71% chance of the UK remaining in the EU, it is clear traders are heavily betting that the late February low of $1.3836 represents the bottom for GBP/USD.

Despite a new round of easing from the RBA, the substantial gains in Asia overnight have failed to provide a bullish spark for European markets. While the Australian economy remains closely tied to the unpredictable economic fortunes of China, it is domestic inflation expectations (currently 1.3%) which have sparked the decision to cut rates to a record low of 1.75%. Meanwhile, the Chinese Caixin manufacturing PMI fell further into contraction. With the Caixin reading focusing on SME’s, it is clear that while large firms are feeling the benefits of government spending and increasingly expansionary policies at the PBoC, the smaller firms remain exposed to slowing growth and trade.

UK manufacturing fell back into contraction in April, with the PMI reading tumbling to the lowest level since March 2013. This is the culmination of an underwhelming start to 2016, which saw manufacturing suffer across the Western world. It is clear that while the FX markets are largely disregarding the notion of a Brexit, manufacturing firms are cutting employment and stocks in response to the growing uncertainty of future business environment.

Ahead of the open we expect the Dow Jones to start 112 points lower, at 17,779.