GENEVA — The US dollar sank to a two-year low after the Empire Manufacturing index warned that the business conditions in the US deteriorated significantly more than expected in August, with the headline figure showing a decline to 3.7 from 17.2 printed a month earlier. New orders slipped back to the contraction zone, unfilled orders and average workweek indices printed a further decline below zero and the medium-term expectations worsened, signaling that the economic recovery in the US is losing momentum, and the slow progress in fiscal talks appears to be weighing on the small, medium-size business outlook. There are two ways the market reacts to weak data. Either investors scale back their risk holdings on the back of deteriorating business conditions and the expectation of further contraction in company revenues, or they ramp up their risk allocation in hope that the bad figures would give a boost to the stimulus talks. Looking at the US equity indices’ performance yesterday, we could tell that investors continue betting on more fiscal stimulus even though they will have to wait until the US policymakers are back to office in early September. The S&P500 (+0.27%) tested the February closing record for the third time in a week but failed to break it, and Nasdaq (+1.00%) extended gains as investors dumped their bank stock holdings and moved more capital towards the most popular big tech. Meanwhile, the US announced more restrictions on Chinese tech giant Huawei, adding another 38 of its affiliates in 21 countries to its blacklist to limit adoption of Huawei’s 5G technology. President Trump said the US doesn’t want to do business with these companies due to national security issues. We are now in a dynamic where each step taken by the US hammers the hope of seeing the US-China relationship improve, deteriorate the basis for healthy trade talks and tears the two countries away from each other. Escalating US-China tensions weighed on sentiment in Asia. Equities in Shanghai (+0.32%) and Hong Kong (-0.02%) lacked direction, the ASX (+1.00%) erased earlier gains as the Reserve Bank of Australia (RBA) minutes hinted at no further measures to loosen the financial conditions and the Nikkei (-0.29%) suffered from a stronger yen. Activity on European futures hint at a soft start on Tuesday. Energy and financials will likely continue weighing on the FTSE 100. Demand in US treasuries rose as markets lacked direction; the US 10-year yield is below the 0.70% mark again. Hesitation in risk assets and the retreat in US yields fueled demand in gold, sending the price of an ounce to $1,995 in Asia. We could see a renewed advance above the $2,000 handle as the persistent softness in the US dollar remains supportive of gains, but entering new long positions at the current levels demands solid nerves given the potential of a severe one-off correction in a market swamped with speculative positions. The EURUSD and the GBPUSD are poised for further gains on the back of a persistent sell-off in the US dollar, as well. In the absence of major economic data and events, traders will likely avoid swimming against the tide. WTI crude consolidates above its 200-day moving average despite weak economic data and waning demand prospects. Yet, solid offers are eyed above the $43 per barrel. — The writer is senior analyst at Swissquote Bank