A rout in the riskier corners of the global market deepened, with stocks plunging and traders rushing to the safety of bonds as concerns about a slowdown in the world’s largest economy intensified.
From New York to London and Tokyo, equities got pummeled. About 95 per cent of the shares in the S&P 500 got hit, with the index on track for it biggest slide in almost two years. Losses were more pronounced in the big tech space, with the Nasdaq 100 heading to its worst start to a month since 2008. A gauge of the “Magnificent Seven” megacaps like Nvidia Corp. and Apple Inc. plunged almost 10% at one point.
Just as stock markets were starting to celebrate signals from the Federal Reserve about a first rate cut, they were hit by a perfect storm: surprisingly weak economic data that’s brought back recession fears, underwhelming corporate earnings and poor seasonal trends. The repricing was so sharp that at one point the swap market assigned a 60% chance of an emergency rate reduction by the Fed over the coming week. While those odds subsequently ebbed to about 32 per cent, the wager is a testament to investor anxiety.
“The economy is not in crisis, at least not yet,” said Callie Cox at Ritholtz Wealth Management. “But it’s fair to say we’re in the danger zone. The Fed is in danger of losing the plot here if they don’t better acknowledge cracks in the job market. Nothing is broken yet, but it’s breaking and the Fed risks slipping behind the curve.”
The wave of selling hit a fever pitch in Japan as traders rushed to unwind popular carry trades, powering a 2.5 per cent surge in the yen and causing the Topix stock index to shed 12% and close the day with the biggest three-day drop in data stretching back to 1959. The rout wiped out $15 billion of SoftBank Group Corp.’s value on Monday.
Both the S&P 500 and the Nasdaq 100 fell 2.5 per cent. Nvidia plunged 5.5 per cent on a report its upcoming artificial-intelligence chips will be delayed. News that Warren Buffett’s Berkshire Hathaway slashed its stake in Apple further drove risk-off sentiment. Wall Street’s “fear gauge” — the VIX — headed toward the highest since 2021.
Treasury 10-year yields dropped two basis points to 3.77 per cent. The dollar fell as the prospect of Fed easing dimmed the greenback’s appeal. A gauge of perceived risk in the US corporate credit markets saw its biggest-one day spike since March 2023, after Silicon Valley Bank collapsed. Cryptocurrencies reeled from a bout of risk aversion in global markets, at one point sending Bitcoin down more than 16%. Commodities from copper and gold to oil plunged.
“Decelerating or slowing economic growth has sparked a classic flight-to-quality trade with short term Treasuries being the prime beneficiary,” says Gary Pzegeo at CIBC Private Wealth US. “What we are seeing is an unwinding of trades dependent on the higher for longer Federal Reserve theme. We will be watching the short-term funding markets for signs of further damage in the near term.”
To Michael Gapen at Bank of America Corp., markets are getting ahead of the Fed again.
“Incoming data have raised concerns that the U.S. economy has hit an air pocket. A rate cut in September is now a virtual lock, but we do not think the economy needs aggressive, recession-sized cuts.”
Investors should hedge their risk exposure even if they own high quality assets as U.S. stocks extend losses, according to Goldman Sachs Group Inc.’s Tony Pasquariello.
“There are times to go for the gas, and there are times to go for the brake — I’m inclined to ratchet down exposures and roll strikes,” Pasquariello wrote in a note to clients. He added that it’s difficult to think that August will be one of those months where investors should carry a significant portfolio risk.
The U.S. stock plunge is vindicating some of Wall Street’s most prominent bears, who are doubling down with warnings about risks from an economic slowdown.
JPMorgan Chase & Co.’s Mislav Matejka — whose team is among the last-standing high-profile pessimistic voices this year — said stocks are set to stay under pressure from weaker business activity, a drop in bond yields and a deteriorating earnings outlook. Morgan Stanley’s Michael Wilson warned of “unfavourable” risk-reward.
“This doesn’t look like a ‘recovery’ backdrop that was hoped for,” Matejka wrote. “We stay cautious on equities, expecting the phase of ‘bad is bad’ to arrive,” he added.
As the selloff in global stocks intensified Monday, JPMorgan Chase & Co.’s trading desk said the rotation out of the technology sector might be “mostly done” and the market is “getting close” to a tactical opportunity to buy the dip.
Buying of stocks by retail investors has slowed quickly, positioning by trend-following commodity trading advisers has fallen a lot across equity regions and hedge funds have been net sellers of US stocks, JPMorgan’s positioning intelligence team wrote in a Monday note to clients.
“Overall, we think we’re getting close to a tactical opportunity to buy-the-dip and our Tactical Positioning Monitor could dip further in the next few days,” wrote John Schlegel, JPMorgan’s head of positioning intelligence. “That said, whether we get a strong bounce or not could depend on future macro data.”
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