A mid-morning European catchup
Time for a quick catch-up, after around three hours of trading in London.
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Global stock markets are in retreat today as the selloff which began last week, sparked by fears of a US recession, accelerates.
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Japan’s stock market has posted its biggest one-day drop since 1987, with the Nikkei plunging over 12% today.
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The Yen has strenthened to a seven-month high, as investors continue to react to last weeks’s surprise rise in Japanese interest rates. That has hurt investors who were involved in the yen carry trade – borrowing the yen cheaply, to buy other higher-yielding assets.
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European stock markets are all in the red. The UK’s FTSE 100 index is currenty down almost 2%, or -196 points, at 8014 points, having hit its lowest level since April this morning.
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Across the Channel, France’s CAC is down 2.3%, while Germany’s DAX has lost 2.7% and Italy’s FTSE MIB is down 2.8%. Banks and tech stocks are among the major fallers in Europe.
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Wall Street is heading for another bath, with the Dow Jones industrial average set to fall around 1.6%.
US investors have been unsettled by weak economic data, such as last Friday’s drop in job creation.
Samer Hasn, senior market analyst at XS.com, says:
The collapse comes amid concerns about the health of the US economy after Friday’s shocking data, coupled with the uncertainty created by poor earnings season and heightened geopolitical tensions in the Middle East.
The extremely negative non-farm payroll figures sparked a wave of concern about the possibility of achieving a hard landing in light of rising interest rates.
Key events
“One heck of a deleveraging” is taking place in the markets today, says Brad Bechtel of investment bank Jefferies.
He says the surge in the value of the yen today – up 3.4% at one stage against the dollar to 141.675¥/$ – is “just mind-boggling”, explaining:
Most European markets are down over -2% with SPX futures -2.8% pre-market. One heck of a deleveraging taking place now and with the market so unhinged it’s hard to call a bottom just yet.
I thought we had reached extremes in USD/JPY at 146.00 but here we are at 142.14, and it’s hard to say where the bottom will show up. We are now 20 big figures off of the highs, from 162 to 142 in 4 weeks. Astounding move for a major currency like the JPY, just mind-boggling.
Small US company stocks are also heading for a bath today.
The Russell 2000 – the small-cap U.S. stock market index – is down 4.5% on the futures market.
⚠️ RUSSELL 2000 FUTURES SLIDE 4.5%
— PiQ (@PiQSuite) August 5, 2024
Saxo: The perfect storm has hit markets. Here’s why:
Saxo’s chief investment strategist, Peter Garnry, identifies five factors behind the stock market selloff:
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Recession fear as the “Sahm Rule” is triggered. The “Sahm Rule” is triggered when the 3-month average US unemployment rate is up more than 0.5% from its low over the previous 12 months. This indicator has correctly identified every recession since WWII, so its triggering on Friday planted the seeds of recession fear that led to declines in equities.
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AI profit taking after massive bull market. The AI and semiconductor theme had been one of the strongest themes over the past year. When there is a turnaround in sentiment the pockets with the most momentum are always hit the most.
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Japan’s surprise rate hike upsetting funding markets. The Japanese central bank has kept its policy rate much lower than any other central bank throughout this entire cycle causing the Japanese yen (JPY) to consistently decline. As a result JPY has been a key funding current for leverage in financial markets. The central bank’s surprise decision to hike the policy rate last week while making hawkish comments have caused turmoil in JPY and funding markets.
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1-day options and the “divergence trade”. The US options market has become enormous and especially the 1-day options market has become a dominant force. In addition, Wall Street has been playing an options game called “divergence trade” which involved selling VIX futures and buying call options on technology stocks. When the VIX Index explodes higher this trade has to be unwound quickly. It adds to the volatility and increases market moves.
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Historical equity market concentration. We have written a lot about this topic. In late June the US equity market reached its highest market concentration since the 1930s meaning that the equity market weighting is dominated by a small group of stocks. This increases the risk in the equity market because the diversification is lower and thus more fragile to a change in sentiment as we have seen today.
Anxiety over growth prospects is hitting the price of copper – a bellwether for the global economy.
Benchmark copper traded in London has dropped by 1.9% today to at $8,887 a metric ton, the lowest since March 28, Reuters data shows.
‘No sign of turbulence easing’
The dominant theme in the markets is the unwinding of various carry trades in currencies such as the yen, says Fawad Razaqzada, market analyst at City Index and FOREX.com.
As flagged earlier, “carry trade” is a strategy where traders borrow money at low-interest rates and invest it in higher-yielding assets. It worked well for Japan’s yen, untill the BoJ raised interest rates last week.
Razaqzada says:
It’s been a rough ride for global risk assets lately, and the turbulence shows no sign of easing at the start of this week. Investors are gripped by fears that the Federal Reserve has waited too long to pivot on its policy, especially in light of Friday’s disappointing US jobs data and a slew of other weak economic indicators pointing toward a looming recession.
It appears as though Friday’s soft jobs report was a game-changer for US rates markets. Short-term US yields took a nosedive as the market consensus shifted dramatically, now expecting the Fed to slash rates significantly this year. We’re talking about a massive shift: the market is now pricing in around 120 basis points of Fed rate cuts before year-end, all driven by recession fears. No more hoping for a smooth, orderly adjustment in Fed policy. In fact, investors are now bracing for a 50-basis point cut in September, double the 25 basis points they were anticipating before.
Falling bond yields have flipped the script on low-yielding currencies. After a tough first half of the year, these currencies are now on the rise. With the Fed and other major central banks expected to lower interest rates, the US dollar and other high-beta currencies are being dumped in favour of the Japanese yen, Swiss franc, and Chinese renminbi. The yen, in particular, is getting an extra boost from last week’s hawkish BOJ rate decision, adding to its newfound strength.
A mid-morning European catchup
Time for a quick catch-up, after around three hours of trading in London.
-
Global stock markets are in retreat today as the selloff which began last week, sparked by fears of a US recession, accelerates.
-
Japan’s stock market has posted its biggest one-day drop since 1987, with the Nikkei plunging over 12% today.
-
The Yen has strenthened to a seven-month high, as investors continue to react to last weeks’s surprise rise in Japanese interest rates. That has hurt investors who were involved in the yen carry trade – borrowing the yen cheaply, to buy other higher-yielding assets.
-
European stock markets are all in the red. The UK’s FTSE 100 index is currenty down almost 2%, or -196 points, at 8014 points, having hit its lowest level since April this morning.
. -
Across the Channel, France’s CAC is down 2.3%, while Germany’s DAX has lost 2.7% and Italy’s FTSE MIB is down 2.8%. Banks and tech stocks are among the major fallers in Europe.
-
Wall Street is heading for another bath, with the Dow Jones industrial average set to fall around 1.6%.
US investors have been unsettled by weak economic data, such as last Friday’s drop in job creation.
Samer Hasn, senior market analyst at XS.com, says:
The collapse comes amid concerns about the health of the US economy after Friday’s shocking data, coupled with the uncertainty created by poor earnings season and heightened geopolitical tensions in the Middle East.
The extremely negative non-farm payroll figures sparked a wave of concern about the possibility of achieving a hard landing in light of rising interest rates.
Michael Langham, economist at abrdn, argues that the macroeconomic backdrop is not as serious as the tumbling markets suggest:
“US recession fears are back as a dominant theme, driven by a combination of a rapid loss of momentum in the labour market and reports of soft consumer demand in earnings reports. Market pricing is now indicating a belief that the Fed is behind the curve and will cut rapidly in upcoming meetings to avoid a hard landing. This has all spilled into Asian markets, with carry trades unwinding and risk-off sentiment prevalent.
However, we think the macro backdrop isn’t as terminal as markets are indicating. Strong labour supply growth in recent years has helped to cool the labour market and layoffs remain low in the US. In Asia, the upturn in tech exports and still buoyant domestic demand shouldn’t set alarm bells ringing yet for policymakers. We expect the Fed to begin easing in September, which should provide the runway for cutting cycles in parts of emerging Asia, and likely further stimulus in China could also have some positive spillovers, softening any slowdown in the region.”
Worryingly, Wall Street’s fear gauge, the VIX, has risen to a four-year high.
Volatility has driven the VIX up to levels not seen since June 2020.
The momentum crash drives the CBOE VIX to a four-year high at 41.8%, just three weeks after it hit a six year low at 10.6% Chart: Bloomberg pic.twitter.com/egEVJcDsuF
— Ole S Hansen (@Ole_S_Hansen) August 5, 2024
Markets are classic sea of red today, flags Chris Beauchamp of IG:
Me in June: gosh a nice little pullback in equity markets would be nice.
Me now: er, no, not like that.
— Chris Beauchamp (@ChrisB_IG) August 5, 2024
Big Tech stocks are heading for further losses when Wall Street trading begins.
Nvidia is down 9% in pre-market trading, while Apple is down 8%, Microsoft is off 5%, Alphabet is 4.7% lower and Amazon is heading for a 2.8% drop.
The selloff is a ‘somewhat healthy correction’ rather than a crash, argues Christian Mueller-Glissmann, Goldman Sachs’ asset allocation research head.
He’s explained to Bloomberg TV that Goldman had turned more cautious a few weeks ago – partly because US economic data had become weaker. The wider markets, though, had treated that ‘bad news’ as ‘good news’, as it could spur interest rate cuts.
Soaring valuations in the tech space were another concern, as was uncertainty over the US general election.
Here’s a clip here:
Goldman Sachs’ Christian Mueller-Glissmann says the market situation is showing a “somewhat healthy correction”
He also says the US data weakness was a surprise, but Goldman Sachs’ economists are “not that worried.” Follow our live blog for updates https://t.co/HYgEqNUdIm pic.twitter.com/nRsSbXYUrO
— Bloomberg TV (@BloombergTV) August 5, 2024
Some happier news: UK services activity growth accelerated in July.
Purchasing managers surveyed by S&P Global show that demand for UK services rose at fastest pace since May 2023 last month.
Business confidence rebounded to a five-month high, with many businesses reporting higher sales volumes, the latest UK UK Services PMI report shows.
Joe Hayes, principal economist at S&P Global Market Intelligence, explains:
“With the general election period coming to an end at the start of July, survey data for last month showed the UK service sector enjoyed a modest rebound after a fairly subdued end to Q2.
The Business Activity Index crept up only slightly, but the New Business Index jumped by over three points to its highest level in 14 months as firms reported an influx of new clients and contracts.
The stock market turmoil shows the importance of a well-balanced portfolio, argues Ben Seager-Scott, chief investment officer at Forvis Mazars:
“Last week ended on a sour note for global equities following a bad run of results from a number of US mega cap technology stocks and poor economic readings in the form of Purchasing Manager Indices and the latest US labour market report.
With expectations set high earlier this year, it doesn’t take much bad news to create sharp movements to the downside. However, it is too easy to be drawn to the worst-case scenario, and on the whole, we remain neutral. What this does highlight though is the need to look beyond a small selection of equities and markets when managing your portfolio.”
Some stock market darling have been hit badly by the recent change in sentiment.
Chipmaker Nvidia, for example, are down 14% in the last month, but up 140% in the last year.
More weak economic data from the eurozone: investor morale in the euro area has fallen for the second month running.
The Sentix index for the euro zone fell to -13.9 points for August, from -7.3 in July, which is its weakest reading since January.
UBS Global Wealth Management’s base case remains that the US economy will avoid a recession with growth remaining close to the 2% trend rate.
They’ve also increased their expectations for US interest rate cuts, and expect a full percentage point reduction by the end of 2024.
Mark Haefele, their chief investment officer, says:
“US equities and bond yields fell in tandem on Friday due to weak US jobs data, raising concerns that the Fed may have delayed rate cuts too long, risking a recession.
We now anticipate 100 basis points of rate cuts this year, up from our previous forecast of 50 basis points.”
Back in the markets, the FTSE 250 index of smaller UK companies is also having a torrid time.
The FTSE 250 – seen as a better barometer of the British economy than the FTSE 100 – has shed 2.5% this morning.
It’s being dragged down, partly, by oil services company John Wood Group – its shares have tanked by 38% after Dubai-based suitor Sidara abandoned its takeover attempts.
Sidara blamed “rising geopolitical risks and financial market uncertainty at this time”….
Eurozone grows “at a snail’s pace in July”
Just in: the eurozone economy stalled in July as demand for goods and services deteriorated.
That’s according to the latest poll of purchasing managers, by data firm S&P Global.
It’s eurozone Composite PMI Output Index has fallen to a five-month low of 50.2, a level which shows activity barely rose last month (50 is the cut-off between expansion and contraction).
Growth in the services sector slowed, with companies reporting a weakening in new business.
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, says:
“The eurozone’s economy is growing at a snail’s pace in July. Sector-wise, services is not picking up speed like it did earlier in the year, while the industrial slump has continued unabated. Because of this, the HCOB Composite Output PMI is just hovering above the expansion line.
So, while the second half of the year started off pretty weak, the PMIs and the official numbers for economic growth in the second quarter were surprisingly good. Given this situation, our 0.7% growth forecast for the year is still conservative. “You cannot miss the slowdown in the service sector. The PMI has dropped for three months straight to 51.9, companies have been more hesitant about hiring, and new business is barely ticking up.
The extraordinary effects from the European Football Championships in Germany, the Olympics in France, and Taylor Swift’s concert tour in Europe are winding down too. So, the service sector probably won’t give us much of a boost in the second half of the year.
After an hour’s trading, the UK stock market has sunk deeper into the red.
The FTSE 100 share index of the largest companies listed in London has now fallen below the 8,000 point mark for the first time since April.
It’s down 190 points, or 2.3%, at 7,984 points – on track for its worst day since last October.
Just two companies are bucking the selloff – Haleon (maker of toothpaste, vitamins and pain relief) and BAE Systems (maker of fighter jets, combat vehicles and warships). They’ve both up around 0.9%.