Concerns about a slowdown in the world’s largest economy led to a selloff in riskier market segments, causing global stocks to plunge and sparking speculation that the equity rally of the year might have reached its peak.
Economic Concerns Drive Global Stocks Decline
From New York to London and Tokyo, equities experienced significant declines. Just as markets were beginning to celebrate signals from the Federal Reserve about a potential rate cut, they were struck by a confluence of weak economic data, disappointing corporate earnings, and adverse seasonal trends. About 90% of global stocks in the S&P 500 were affected, with the index on track for its largest drop in nearly two years. Losses were especially severe in the tech sector, with the Nasdaq 100 poised for its worst start to a month since 2008.
Bond Market Reactions and Currency Movements
Bond traders are betting that the economy may deteriorate quickly enough to necessitate aggressive policy easing by the Fed. At one point, the swap market indicated a 60% chance of an emergency rate cut by the Fed in the coming week. Although those odds have since decreased to about 32%, the shift highlights investor anxiety.
Callie Cox of Ritholtz Wealth Management noted that while the economy is not in crisis yet, it is in a precarious position. She cautioned that the Fed might risk falling behind if it does not address emerging cracks in the job market.
Treasury 10-year yields remained relatively stable at 3.79%. The dollar weakened as expectations of Fed easing diminished the greenback’s appeal. A gauge of perceived risk in US corporate credit markets saw its largest single-day spike since March 2023, following the collapse of Silicon Valley Bank. Cryptocurrencies also suffered from risk aversion, with Bitcoin falling more than 16% at one point.
Japan’s Market Turmoil
In Japan, the selloff reached a fever pitch as traders unwound popular carry trades, leading to a 2.5% surge in the yen. The Topix stock index plunged 12%, marking its biggest three-day drop since 1959. This rout led to a $15 billion loss in value for SoftBank Group Corp. (OTCMKTS:SFTBY).
Gary Pzegeo of CIBC Private Wealth US highlighted a classic flight-to-quality trade, with short-term Treasuries benefiting from the economic slowdown. He indicated that the current environment reflects an unwinding of trades based on the “higher for longer” Federal Reserve theme and suggested monitoring short-term funding markets for further signs of distress.
Michael Gapen of Bank of America Corp. (NYSE:BAC) believes that markets are once again moving ahead of the Fed. He noted that while a rate cut in September seems likely, aggressive cuts may not be necessary given the current economic conditions.
Goldman Sachs Group Inc.’s (NYSE:GS) Tony Pasquariello advised investors to hedge their risk exposure, even if they hold high-quality assets, as US stocks extend their losses. He suggested that August may not be a favorable month for carrying significant portfolio risk.
Wall Street Bears and Tactical Opportunities
The US stock decline is reinforcing warnings from some Wall Street bears who remain cautious about an economic slowdown. Mislav Matejka of JPMorgan Chase & Co. (NYSE:JPM) and Michael Wilson of Morgan Stanley (NYSE:MS) have both expressed concerns about weaker business activity, falling bond yields, and a deteriorating earnings outlook. JPMorgan’s trading desk indicated that the rotation out of the technology sector might be nearing its end and suggested that the market is approaching a potential buying opportunity.
Retail investor stock purchases have slowed, and trend-following commodity trading advisers have reduced their positions across equity regions. Hedge funds have been net sellers of US stocks, according to JPMorgan’s positioning intelligence team, which sees a potential tactical opportunity to buy the dip, depending on future macroeconomic data.
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