August 5, 2024
Good morning,
Following Friday’s weak June employment report, stocks, yields, and the U.S. dollar plunged while volatility spiked higher. It was a growth scare for the market that resulted in an overwhelming call for a 50 bps rate cut by the Fed at their next meeting on 9/18. Last Wednesday the Fed all but confirmed that the first rate cut in this cycle would be 25bps in September. Literally hours later, the market is again bullying the Fed for more – some things never change.
Over the weekend, I was trying to position Friday’s onslaught with the bigger market picture for the coming weeks/months. Friday’s move was a massive mindset shift from a soft to a hard landing on one employment report. There was some technical damage done on Friday, but the overall technical picture still leaned just slightly bullish as of Friday’s close. Modest over-reaction? That’s what I thought I’d be writing this morning. I was wrong.
Meltdown mode is here this morning, and today will be a doozy. The biggest story of the overnight session was the stunning 12.4% drop in the Nikkei, which took the month-to-date return for Japanese stocks down to almost -20%. As a reminder, August is three trading days old in Asia. Korea (-8.77%) and Taiwan (-8.35%) also took it on the chin, though losses in Europe have been on a more modest scale. U.S. futures are weak; S&P -4.5%, NASDAQ -6%, Russell -6% and moving quickly. You cannot lay this all at the door of an unwinding of the AI trade; the Russell is down more than NASDAQ since last Thursday. Oh, there is one more important index to report on: the volatility index (VIX) crossed 50 this morning.
The moves in bond-land are perhaps more extraordinary than what is going on in equities. The U.S. 2yr-Treasury is now trading 2 bps below the 10yr at 3.66%.
Emotions are running high. There is suddenly a sense of panic and financial meltdown in the air that doesn’t necessarily have an obvious proximate cause. These kinds of moves usually take a few days to sort out, but overall, while I agree with the direction, I suspect it is overdone.
There is another big data point this morning: ISM-Services at 10am. I’ll be back tomorrow to assess today’s behavior and try to discern what it means for the longer-term picture.
Be well,
Mike
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