Shares fell in Europe and Asia on October 2 after a disappointing update on American manufacturing pulled US stocks sharply lower. Germany's DAX declined 1.1% to 12,132.11 while the CAC 40 in Paris shed 1.2% to 5,528.67 and Britain's FTSE 100 sank 1.3% to 7,263.95. New York looked set to extend losses, with the future contract for the S&P 500 down 0.4% to 2,927.00. The Dow future was down 0.3% at 26,431.00. With the date set for Britain's departure from the European Union less than a month away, Prime Minister Boris Johnson said he would submit what he says is the UK's "final offer" for a Brexit deal on Wednesday. Johnson says the proposal is a "fair and reasonable compromise," but it is likely to face deep skepticism from EU leaders, who doubt the UK has a workable plan to avoid checks on goods or people crossing the border between EU member Ireland and the UK's Northern Ireland after Brexit.

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The trade slump

The broader concern weighing on the markets was a US report showed that manufacturing weakened in September for the second straight month as President Donald Trump's trade war with China dragged on confidence and factory activity. It dashed economists' belief that August's contraction was an aberration, and stocks and bond yields immediately reversed course to drop sharply lower following the report. The pain was shared in Asia, where Japan's Nikkei 225 index shed 0.5% to 21,778.61 while the Hang Seng in Hong Kong lost 0.2% to 26,042.69. Sydney's S&P ASX 200 gave up 1.5% to 6,639.90. Markets in mainland China were closed for the National Day holidays. They reopen on October 8. India's markets are also closed. The Kospi in South Korea sank 2% to 2,031.91 after North Korea fired a ballistic missile toward the sea, according to South Korea's military. The display of Pyongyang's expanding military capabilities came just hours after it said it would resume nuclear diplomacy with the United States this weekend. Not all manufacturing data was so gloomy, said Jeffrey Halley of Oanda.

"The UK, core Latam and emerging Asia seem to be holding their own, and it is far too soon to say that the U.S. is about to wither on the vine. If they are doing so in such a toxic global trade environment, then imagine how they may perform if we get a trade breakthrough in the coming weeks. It's not all doom and gloom in the Markits," Halley said in a commentary.

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Overnight, the S&P 500 slumped 1.2% to 2,940.25 for its sharpest loss since August. The Dow Jones Industrial Average fell 1.3% to 26,573.04, and the Nasdaq composite dropped 1.1% to 7,908.68. Small-company stocks fell more than the rest of the market. The Russell 2000 index lost 2%, to 1,493.43. In the bond market, the yield on the 10-year Treasury dropped to 1.65% from 1.74% before the report's release, which is a big move. Three stocks fell for every one that rose on the New York Stock Exchange, and gold climbed as investors sought safer ground. Manufacturing is a relatively small part of the US economy, but investors the doldrums might spill into other areas. That puts an even bigger spotlight on a jobs report due out Friday, which economists expect to show an acceleration in hiring.

"Granted, manufacturing equates to a mere 11% of U.S. GDP, but the market ... is incredibly sensitive to the outcome," Chris Weston of Pepperstone said in a report.

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Effects of US-China Trade war

The protracted trade war with China is hammering export manufacturing. It also raises uncertainties over the future rules of international trade, causing CEOs to curb spending. In energy trading, benchmark crude oil rebounded, gaining 47 cents to $54.09 per barrel in electronic trading on the New York Mercantile Exchange. It fell 45 cents to $53.62 a barrel on Tuesday. Brent crude oil, the international standard, picked up 23 cents to $59.12 per barrel. The dollar slipped to 107.71 Japanese yen from 107.73 yen on Tuesday. The euro dropped to $1.0914.
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