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It has turned into a turbulent summer for global financial markets.
Equity indices in the US and Japan plunged on Friday and Monday before staging a partial rebound, while US Treasury yields and global currencies swung around sharply. Illustrating investors’ nervousness, a gauge of expected US stock market volatility surged to its highest level since the Covid-19 pandemic in 2020.
“Some of the moves we’ve seen over the past few days have been historic,” said Ben Powell, chief investment strategist for Apac within the BlackRock Investment Institute.
Weak US jobs data on Friday may have provided the spark for the market’s recent jitters “but there was also plenty of kindling”, he added.
The rise and fall of Japanese stocks
Tokyo's stock market surged relentlessly to an all-time high in the first half of this year ...
... before promptly losing all of its year-to-date gains
Japan has been at the eye of the storm, partly because markets there had enjoyed such a strong run this year. Three weeks ago the Topix index was at an all-time high, driven by renewed interest in Japanese stocks among international investors.
But many of them headed swiftly for the exit after the Bank of Japan last week raised interest rates to the highest level since 2008, sparking a lightning rally in the yen.
As the currency strengthened, the Topix plummeted 12.2 per cent on Monday — wiping out its gains for the year in its sharpest sell-off since “Black Monday” in October 1987. The index rebounded 9 per cent the following day but remains far below its recent peak.
The not so Magnificent Seven
Big Tech stocks were already suffering during the recent earnings season, as a sector that had powered the majority of Wall Street’s gains this year failed to deliver on investors’ sky-high expectations.
As they were swept up in the recent global rout, about $1tn was wiped from the market capitalisation of the so-called Magnificent Seven — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — in two days.
“It is stock markets, not the US economy, that needs correction,” said Freya Beamish, chief economist at TS Lombard. “The bubble in markets [was] clear, with huge dependency on a few very high-valuation stocks.”
Everything all at once
Selling on Friday and Monday spread far beyond the tech sector, sucking in banks, industrials, small-caps and consumer cyclicals — a much broader slump than previous market pullbacks this year.
A closely watched measure of the degree to which US stocks move up or down together jumped, as shares across the market tumbled in lockstep.
That was a stark contrast to earlier in the summer, when correlation slumped to a record low, helping to damp market volatility and lulling investors into a state of “complacency”, according to UBS strategist Gerry Fowler.
The Vix awakens
Market volatility has been muted this year ...
... but surged on Monday ...
...reaching levels not seen since the start of the Covid pandemic
The scale of panic showed up in the Vix index of expected turbulence in the S&P 500, commonly known as Wall Street’s “fear gauge”.
The measure soared to its highest level since the early stages of the pandemic in 2020 as investors reacted to the wild gyrations in equity and bond markets.
On a day of large price moves, the jump in the Vix was “particularly violent,” said Guy Stear, head of developed markets strategy at Amundi.
The US Treasury curve briefly looked normal
The US yield curve has been inverted for two years ...
...but it temporarily uninverted on Monday
The US Treasury market has been flashing a warning signal about the economy for more than two years.
The “inversion” of the yield curve — where two-year borrowing costs rise above 10-year borrowing costs — typically signals a recession is on the way. Before the recession actually arrives, the inversion typically ends.
That briefly happened at the peak of Monday’s market turmoil, in the wake of weak US jobs data on Friday that triggered fears that growth was rapidly slowing and set off convulsions in bonds.
But by the end of Monday’s trading session, Treasuries were back to where they started, as markets sent wildly fluctuating messages about the outlook for the world’s largest economy.
On Monday morning, US government bonds “were pricing in recession and aggressive Fed cutting”, said Mike Zigmont, head of trading at Harvest Volatility Management. “By the afternoon, Treasuries were acting as if it were just a boring day.”
A carry on with the yen
At the start of July the yen was at its weakest level against the dollar in more than 34 years as Japanese and US interest rates diverged. That encouraged investors to load up on a speculative trade of borrowing cheap yen to fund high-yielding bets elsewhere.
But the yen began to rally in July and surged last week when the Bank of Japan raised borrowing costs. That forced traders to unwind their positions, drawing some emerging market currencies into the turbulence.
“Yen-funded carry trades have provided meaningful, dynamic funding for [long-positions] all over the world,” said BlackRock’s Powell, who expected further volatility as those trades continued to unwind.
Additional reporting by Rafe Uddin in London |
