(Reuters) – Share markets around the world tumbled and bonds rallied on Monday as fears the United States could be heading for recession sent investors rushing from risk assets while wagering interest rates will have to fall rapidly to rescue growth.
Japan’s Nikkei shed a staggering 12% to hit nine-month lows, entering bear market territory and marking its biggest one-day percentage drop since October, 1987.
Europe’s broad STOXX 600 index was down 3%. The S&P 500 was down 2.7 shortly after the open, on track to market a correction if it closes 10% down from its recent record high. U.S. Treasury yields fell sharply then steadied after strong ISM service sector data. The 2-year/10-year yield curve spread briefly disinverted and was last at -11 basis points.
The yen hit a 7-month peak.
QUOTES:
NEVILLE JAVERI, HEAD OF EMPIRIC LT EQUITY, ALLSPRING, WASHINGTON, DC
“The sell-off started off with the jobs data last week and it clearly led to the belief that the Fed needs to start being more proactive around where those unemployment numbers are going. It clearly continued over the weekend, the carry trade in Japan and now today we’re seeing a sell off as an extension of that anxiety that was felt last week”
“I doubt the Fed is going to cut rates before September because the market is selling off. The Fed has a dual mandate, which is inflation and stable employment. That’s what they’re looking for. So I don’t expect an emergency cut. They’ll wait and watch until September”
“Despite the sell-off, It doesn’t look like there’s any sort of stress at this point in the financial market.”
TIM COURTNEY, CHIEF INVESTMENT OFFICER, EXENCIAL WEALTH ADVISORS, OKLAHOMA
“While the market has had several issues to focus on over the last several years (inflation, AI, potential recession, etc.) it has always had one eye squarely fixed on Fed interest rates. To me, this feels very similar to late 2019, when the yield curve had inverted, and the market threw a severe fit that lasted for weeks when it thought the Fed should have lowered rates. The economy is weakening to be sure, but there have been signs of that happening for months. Rather than a signal of recession, I think it more likely a reaction to the Fed keeping rates where they were after investors thought inflation had been tamed. The fact that the AI part of the market had gotten way extended over the last two years has made the reaction even more volatile.”
“Many areas of the market – small caps and international – had already been priced as though a recession were imminent. This part of the market has gotten somewhat cheaper over the last week, and for disciplined investors represents an opportunity to rebalance and buy assets with bad news priced in…Many investors will be shocked that such a pullback in the S&P 500 stacked with successful tech mega caps could happen, but this is what happens when so many investors are all on one side of a trade.”
ERIC WALLERSTEIN, CHIEF MARKETS STRATEGIST, YARDENI RESEARCH, LOS ANGELES
“It’s really a confluence of things. You have the rapid unwind in yen funded trades and geopolitical tensions in the Middle East. Both the shekel and the Israeli stock market are down and you had a lot of crowded positioning in tech. And then we had kind of a weak employment report along with some weakish earnings. So it’s like 5 things hitting it once. But yeah a lot of the big sell off in Japan is clearly tied to the yen. The yield curve is reflecting the market starting to price in rapid cuts from the Fed, like 50 bps in the next couple meetings and then a series of cuts thereafter. I mean, we’re not calling for a recession and we don’t think one is here necessarily. But historically, what you see is the market prices in before a recession that these rapid cuts are coming mostly because they see a financial crisis. So that’s why the yield curve un-inverts. Do I think that necessarily means there’s a recession? No, just like the inverted curve didn’t signal recession for the past couple of years, but that’s kind of what happens and it’s happening again.
“We’ve only had Friday which was really the only sharp day of selling so far and then the overnight session abroad like Thursday was great, right? Stocks were up like 3%. When volatility spikes to these levels, you can get a lot of selling from the volatility control community, from risk parity funds, from CTAs who have triggers with volatility levels and we’ll start to deleverage and de-net their exposures. So something can certainly happen, whether it’s mechanically triggered funds or its retail waking up and seeing myriad headlines and saying, it’s time to de-risk a bit. Sell off can happen and they can be pretty painful, especially when there’s like leveraged trades out there. It doesn’t necessarily stop midday today, but we’ll see how it progresses the next couple days.”
WILL RHIND, CEO, GRANITESHARES, NEW YORK
“Global markets are falling heavily this morning sparked by last week’s decision by the Bank of Japan (BOJ) to raise interest rates by 0.15% which has had the effect of crashing the infamous yen carry trade…In the US, calls for a Fed rate cut, even an emergency one, are now getting louder as signs are that the economy is now slowing as a result of rates staying too high for too long. Volatility as measured by the VIX index has exploded higher and is now trading at a level last seen in the COVID crash of 2020.”
“What does this all mean? Q2 earnings have been a bit of a mixed bag but on the whole have been good, especially for some of the large tech companies. It’s too early to say the economy is really slowing down but perhaps the market rout has now given the Fed the cover its needs to start cutting rates aggressively to stabilize the market. A lot of the volatility today is a natural function of the yen carry trade unwinding and may present a buying opportunity for stocks, especially the highest quality tech names.”
QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA
“What’s happened now is that the narrative has broadened. It’s not just about the labor market. It is now including Berkshire Hathaway announcing another tranche of selling in Apple… and what that always says is: What are they seeing in terms of the economy, in terms of the market? Then, Nvidia this morning, with a glitch with one of the chips they’re preparing to sell. That has pushed Nvidia down markedly.
So what you have is a selloff that began as an overbought market waiting for a catalyst. The catalyst was it looks as if the employment landscape is weakening at a faster pace and the Fed finished its meeting suggesting the soft landing narrative remains intact. Thursday morning it was that the Fed is behind the curve.
Because the next meeting is September 18, that is a long way to go if we continue to see a weakening in the labor market… so the question now is how do they see it? Do they believe it’s necessary to come in with a rate cut in between meetings or are they going to come out with the FOMC speakers due out this week with a kind of orchestrated verbal intervention?”
JOHN LYNCH, CHIEF INVESTMENT OFFICER, COMERICA WEALTH MANAGEMENT, CHARLOTTE, NORTH CAROLINA (emailed note)
“When investors turned their calendars to August, they may have flipped the narrative on the economy at the same time.
“It’s been less than two weeks since the second quarter GDP report surprised to the upside, with equity markets hovering near record levels, yet there is growing sentiment is that the Fed has waited too long to cut interest rates and is now behind the curve.
“While we’re not completely sold on the new narrative, the one thing that seems certain is that there is more volatility ahead.”
JIM CARON, CIO, CROSS-ASSET SOLUTIONS AT MORGAN STANLEY INVESTMENT MANAGEMENT, NEW YORK
“We’ve had exposure to high quality fixed income like everyone else. For Treasuries, we’re certainly not looking at these levels to add exposure. In corporate bonds, we are seeing some spread widening. The question is, is this the start of something much bigger where there’s a stop in economic activity and difficulty accessing credit? We don’t see that happening. Spreads are wider but not at levels that scream great opportunity, so we’re going ride out the fixed income wave for the time being.”
“It’s become much more possible for the Fed to justify a 50 basis point cut. It depends on the August payroll number, if it’s similarly weak (to July) then there’s a good case for a bigger cut.”
JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA
“Sell-offs that manifest themselves through wild swings in the currency markets are sharp and swift, but usually very short lived. Markets are clearly nervous about the divergent paths central banks are taking, leading to lots of volatility. Couple that with a potential escalation of hostilities in the Middle East and a Presidential election cycle that is rife was craziness, things are ripe for negativity. Some say this is overdue, I say use this downturn to pick up some deals.
HARVEY SCHWARTZ, CHIEF EXECUTIVE OFFICER, CARLYLE
“Sentiment can extend itself into problematic ways. It’s way too early to extrapolate that.”
“Portfolio performance looks good, market opportunity feels good, exits still feel good, pending announcements feel good…We’ll see what happens over the next several weeks in terms of market environment, but if anything, I think this will encourage the Fed to take action, which is really what the market is looking for.”
“The trajectory for GDP, the expected Fed rate cuts this year, all the dynamics still tell us the underlying fundamentals support improving activity across our platform for the balance of the year.”
SAMY CHAAR, CHIEF ECONOMIST, LOMBARD ODIER, GENEVA
“There are two things impacting pricing, one is the recession risk and that’s the main worry but on top of that there is a bit of anxiety around geopolitics and the expected retaliation from Iran and Hezbollah after the Israeli strikes.”
“On the first, it does feel that American economic conditions are still acceptable, we’re not seeing a pick up in lay offs, in job cuts. OK the data Friday was poor, but we need to be open to the possibility next month we get job growth number around 150,000 170,000.”
“It’s a game of ping pong. Positioning goes a bit far on one side and then reverses, and market moves have been extreme because positioning has been extreme. We’re going a bit far to the extremes, 3.70% seems a bit far on the U.S. 10 year yield. It was a good buy at 4.50% it is a good sell at 3.70%.”
MOHIT KUMAR, CHIEF ECONOMIST FOR EUROPE, JEFFERIES, LONDON
“First of all we would argue that positioning has been a big driver of recent market moves. U.S. equities, particularly the tech sector, was over owned and some froth needed to be cleared.”
“Our view on the U.S. employment picture has not changed. We have been on the camp of a modest weakening but not a disaster scenario.”
“We do not see the correction in risky assets as a start of a downturn. In our view, correction and clean up of positions does make sense.”
JIM REID, GLOBAL HEAD OF MACRO RESEARCH AND THEMATIC STRATEGY, DEUTSCHE BANK, LONDON
“Markets were on edge before Friday but a weak payrolls has really escalated a profound move across the globe. However the reality is that although payrolls was disappointing it’s hard to know how disappointing given the distortions from Hurricane Beryl. It’s like the market has added up 2+2 and made 9. It’s easily possible we’ll get the additional 3 and 2 to make up the total but we’re certainly not there yet. It’s hard to believe such market moves would have occurred in any other month.”
BEN BENNETT, HEAD OF INVESTMENT STRATEGY FOR ASIA, LGIM, HONG KONG
“Looks like a lot of trades that have done well in the first half of the year are unwinding, some more rapidly than others. I don’t think the rate hike by the Bank of Japan or the US employment report on Friday justify such a big reaction, so I suspect we’re seeing traders being stopped out of positions as volatility spikes.”
RICHARD KAYE, PORTFOLIO MANAGER, COMGEST, TOKYO
“The sudden narrowing of the Japan-U.S. yield gap has provoked the partial normalization of the yen, and the mistaken foreign hot money flows to banks and yen plays are being rightly sold off, which is at the centre of today’s and Friday’s move. Domestic demands SMIDs – GMO Payment, Fast Retailing, are significantly outperforming, and up in absolute terms in dollars for the month, ahead of major global indices.
“In short, not only the currency but the entire ‘value’ trade in Japan which had hijacked our market for two years is being unwound – and great news for serious investors who are most of the market participants, the silent majority eclipsed by recent hot money moves.”
KYLE RODDA, SENIOR FINANCIAL MARKET ANALYST, CAPITAL.COM, MELBOURNE
“The markets are in meltdown and it’s a sea of red across the world. The rapid move in the yen is putting downward pressure on Japanese equities, but it’s also driving an unwind of a major carry trade – investors had leveraged up by borrowing in yen to buy other assets, chiefly U.S. tech stocks.
We are basically seeing a mass deleveraging as investors sell assets to fund their losses. The rapidity of the move has caught a lot of investors off guard; there’s a lot of panic selling now, which is what causes these non-linear reactions in asset prices to pretty straightforward fundamental dynamics.”
DANIEL TAN, PORTFOLIO MANAGER, GRASSHOPPER ASSET MANAGEMENT, SINGAPORE
“In our view, five Fed rate cuts by the end of 2024 seem unlikely. More plausible are two cuts – one in September and one in November – with a total of up to 75 basis points by the end of the year. This suggests potential opportunities to increase duration in upcoming months. Overall, we believe emerging market bonds will perform well by the end of the year in a gradually declining interest rate environment.
“There may still be room for the recent sell-off in equities to continue, given the significant rally in technology stocks earlier this year and investors seeking to sell assets to cover losses.”
GEORGE BOUBOURAS, HEAD OF RESEARCH, K2 ASSET MANAGEMENT, MELBOURNE
“Markets are clearly concerned with the recent weaker economic data. However, extrapolating last Fridays Payrolls data appears an over-reaction as it is only one monthly reading. The rolling 3-month will be a better guide. It is clear the recent data momentum in the U.S. has slowed.
Given the Fed is expected to begin rate cuts (Implied Futures) before the U.S. election (Nov. 5), that may be seen as problematic optically despite the rational that conditions warrant a rate cut. This may add to some pre-election volatility.”
RYOTA ABE, ECONOMIST, SMBC, SINGAPORE
“I think USD/JPY will shift to 140-145 zone because of worse-than-expected NFP (U.S. non-farm payroll report) and the Middle East tensions. And the two reasons will likely weigh on Asian markets as market players will hesitate to take risks in this situation.
“Stronger yen will also weigh on Nikkei index as corporate margins will fall, as many corporates did not expect such a sharp and sudden rise of the Japanese yen at all.”
MASAFUMI YAMAMOTO, CHIEF CURRENCY STRATEGIST, MIZUHO SECURITIES, TOKYO
“There’s a risk that dollar-yen will fall further. The near term at the support will be 144.50, where the 90-week moving average is. If that is, I think the next target will be 140.
“But I would say that this the market pricing of a 50 basis rate cut by the Fed in the September meeting is too much. The U.S. economy is showing signs of slowdown, but it’s not as bad as market is pricing in.”
CHARU CHANANA, MARKET STRATEGIST, SAXO MARKETS, SINGAPORE
“U.S. economic data remains in the driving seat now and the more the U.S. soft landing assumption gets questioned, the further pullback we can see in equity and carry strategies where positioning has also been stretched.
“However, markets have gone a bit too far expecting the Fed rate cuts and four rate cuts priced in for this year seems a stretch considering that the June dot plot showed only one cut and the structural inflation forces in play.”
(Compiled by the Global Finance & Markets Breaking News team)
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