Weather fuelled US ISM rout continues market pressures

• US ISM drops by most against expectations since Lehman

• Australian central bank holds rates, goes AUD neutral

• We suspect this will be a blip, driven by the polar vortex weather

• UK construction PMI at 09.30, Italian CPI at 10.00

Global financial weakness has continued overnight as the market struggled to digest poor data from the world's economic superpowers. I told yesterday of the weakness in Chinese growth shown from slips in the country's manufacturing and services PMIs. Later it was the turn of the US to take on the crown of disappointment.

January has been a month of horrible weather for most of the United States and we believe a lot of yesterday's hideous ISM reading from the manufacturing sector was specifically as a result of this. The ISM reading fell to 51.3 vs an estimated 56.0; the largest drop against estimates since the Lehman crisis, although in that case the overall index fell into contraction; we have remained broadly expansionary so far. Given the area in which the ISM fell - the biggest decline in new orders in 14 years the main culprit - we can reasonably expect a strong recovery next month. The market was not prepared to wait on next month however and gave the USD a strong smack.

The correlation between GDP and ISMs are a lot stronger than any relationship between GDP and payrolls data, due Friday. A move lower in Wednesday's services reading will have analysts taking the axe to their payrolls estimates and increasing chatter that the Fed may have to start tapering the rate of its tapering i.e. slowing the rate of stimulus withdrawal. This would be the 3rd derivative of US monetary policy.

The US's number was not the only disappointment. The UK figure sent the pound lower over the morning as it missed consensus for the 2nd month in row. The number of 56.7 against 57.3 expected shows growth remains well in expansionary territory however. Growth in export orders was the strongest since February 2011 and, thankfully, shows that British exports are being demanded across the world as opposed to just in Europe. Jobs have moved higher as well with the pace of job creation close to a 2.5 year high. These are all encouraging numbers, but they will need to be sustained long through this year and next so that any meaningful rebalancing of the UK economy away from services can accurately be seen.

Eurozone PMIs have been greeted positively in the European session with particular good news coming from the periphery. The overall measure rose to a 32 month high but Greece posted its first reading over 50.0 in 53 months with gains seen in overall output and new orders. Spain’s manufacturing number hit a 41 month high as the jobs market showed a strong turnaround. France’s number improved but remained in contractionary territory.

Overnight the RBA has met the market's estimates on monetary policy by holding rates at the current record low of 2.50%. The attached statement left out any mention of an overly strong AUD for the first time in a few meetings, signalling a central bank becoming a lot more policy neutral. The statement also suggested a greater confidence in consumer demand and housing construction. AUD is over a per cent higher this morning while the JPY has remained the darling of those eager to bet on further declines in risk assets.

The story for today's markets will be a rather strange one; how bad does the US slip need to be for it to be beneficial to the emerging markets? A prolonged, deep slip in the US recovery would have traders betting on an increased stimulus hit from the Federal Reserve and there are 2 things that have been driven higher by the use of quantitative easing - global equities and emerging market currencies.

Today's data calendar is the quietest of the week but volatility can still be found with UK construction PMI at 09.30 and Italian inflation at 10.00.