Turbulent times: Traders on the floor of the New York Stock Exchange. A shaky start to September follows the global rout on Aug 5. — AFP
MOUNTING unease over the US economic outlook and a seasonally weak month for stocks have created another perfect storm of global market volatility, leaving investors scrambling for protection and fearing another round of currency chaos.
Following a rapid recovery for risky assets such as stocks and high-yield bonds from a chaotic early August sell-off, traders have lost their short-lived optimism that US interest rate cuts would support growth.
Instead, they appear to be already getting ahead of US jobs data today that may repeat last month’s weak report, with Tuesday’s weak US manufacturing data triggering fresh selling.
Wall Street’s S&P 500 share index fell over 2% on Tuesday, while Japan’s broad Topix share gauge plunged 3.7% on Wednesday in its biggest daily drop since the Aug 5 market rout and European stocks tumbled.
Meanwhile, the VIX index of expected US equity volatility has hit a one-month high, as choppy currency trading threatened the US dollar and other haven currencies.
“Markets were dealing with uncertain inflation but growth was resilient,” said Florian Ielpo, head of macro at Lombard Odier. “That situation seems to be changing, the new uncertainty is how deep will the slowdown be.”
The shaky start to September follows an early August global rout as a Japanese rate increase and the US jobs data wrecked popular carry trades betting against the yen.
Echoing August’s pain, highly valued tech stocks that investors have crowded into are taking a beating.
Artificial intelligence heavyweight Nvidia slid 9.5% on Tuesday, the deepest ever single-day market value decline for a US company.
Dutch semiconductor equipment supplier group ASML Holdings slumped around 5% on Wednesday.
“One of the big risks is that you have this market concentration, and all it takes is one of those big tech names to be volatile, for it to feed through to the entire market,” said Justin Onuekwusi, chief investment officer at investment firm St. James’ Place.
The shakeout followed investor unease that stocks and bonds had started September with different stories – equity markets had priced robust company earnings while government debt rallied in anticipation of deep US rate cuts and recession risk.
“You need to decide now whether you like credit and bonds or equities,” said Lombard Odier’s Ielpo, who added he had bought government bonds over the last four weeks.
US 10-year bond yields, at around 3.8%, have fallen for the past four months. German Bund yields pulled further away on Wednesday from one-month peaks touched on Monday.
BCA Research recommended selling equities and buying bonds.
“We assign high odds to a recession tipping point,” it said in a client note.
The US Federal Reserve is expected to cut rates for the first time since 2020 on Sept 18, with money markets now pricing a 43% probability of a 50-basis-point reduction in its funds rate to 4.5%-4.75%.
A broad index of high-yield corporate bond performance has also risen 2.5% since dropping briefly in early August.
Ninety One credit fund manager Darpan Haran said he was cautious about US high-yield bonds, sold by borrowers whose weaker financial profiles make them sensitive to economic shocks.
“US high yield is more prone to a repricing because of valuations and US recession fears,” he said.
Traditional currency havens might not shine in this global sell-off, analysts said, because of uncertainty about whether the US dollar would retain its usual appeal when risky assets fall or suffer instead because traders believe a US recession is on the horizon.
Short-term speculators have a roughly US$9bil bet on the US dollar falling against other major currencies, a position that could spark more foreign exchange swings if proven wrong, or further weaken US stocks if it is accurate.
Trend following CTA funds, key players in August’s market sell-off, have built large bets the US dollar will weaken, BNP Paribas head of G10 forex strategy Alex Jekov said. — Reuters
Naomi Rovnick writes for Reuters. The views expressed here are the writer’s own.
