By Naomi Rovnick
LONDON (Reuters) – Growing concerns about the U.S. economic outlook and a seasonally weak month for stocks have unleashed another storm of global market volatility, sending investors scrambling for cover amid fears of a new round of currency chaos.
After a rapid recovery in risky assets such as stocks and high-yield bonds following a chaotic sell-off in early August, traders have lost their short-lived optimism that US rate cuts would boost growth.
Instead, they appear to be anticipating Friday’s U.S. jobs report, which could repeat last month’s weak report. Tuesday’s weak U.S. manufacturing numbers are driving new sales numbers.
The S&P 500 stock index on Wall Street fell more than 2% on Tuesday, while Japan’s Topix stock index fell 3.7% on Wednesday, the biggest daily drop since the stock market crash of August 5. European stocks tumbled.
Meanwhile, the VIX index of expected volatility in US stocks hit its highest level in the past month as volatile currency trading posed a threat to the dollar and other safe-haven currencies.
“Markets have been facing uncertainty about inflation, but growth has been resilient,” said Florian Ielpo, head of macro at Lombard Odier. “That situation seems to be changing, the new uncertainty is how deep the slowdown will be.”
SHAKE OUT
The shaky start to September follows a global decline in early August, when a Japanese rate hike and U.S. jobs data wiped out popular carry trades against the yen.
In an echo of August’s pain, highly valued tech stocks that investors have been flocking to are taking a hit. AI heavyweight Nvidia fell 9.5% on Tuesday, the deepest one-day market value drop ever for a U.S. company. Dutch semiconductor equipment supplier ASML Holdings fell about 5% on Wednesday.
“One of the big risks is that you get a market concentration. It only takes one big tech name that’s volatile and it doesn’t have any impact on the whole market,” said Justin Onuekwusi, CIO at investment firm St. James’ Place.
The reorganization followed investor discomfort that stocks and bonds had started September with different stories, with stock markets pricing in strong corporate earnings while government debt rose in anticipation of deep U.S. rate cuts and the risk of a recession.
“You have to decide now whether to go for credit and bonds or for equities,” said Lombard Odier’s Ielpo, who added that he had bought government bonds over the past four weeks.
US 10-year bond yields, around 3.8%, have fallen over the past four months. German Bund yields on Wednesday retreated further from the one-month highs reached on Monday.
BCA Research advised selling stocks and buying bonds.
“We estimate the likelihood of a recession turning point to be high,” the company said in a letter to customers.
The Federal Reserve is expected to cut interest rates for the first time since 2020 on September 18. Money markets now believe there is a 43% chance of a 50 basis point cut to 4.5%-4.75%.
A broad index of high-yield corporate bond performance has also risen 2.5% since a brief decline in early August.
Darpan Haran, credit fund manager at Ninety One, said he is cautious about US high-yield bonds, which are sold by borrowers with weaker financial profiles and therefore more vulnerable to economic shocks.
“US high yield bonds are more vulnerable to a rerating due to valuations and fears of a US recession,” he said.
DOLLAR NERVOUS POSITIONS
Analysts say traditional currency havens may not shine in this global sell-off, as it is uncertain whether the dollar will retain its usual appeal as risky assets fall, or suffer as traders believe a U.S. recession is looming.
Short-term speculators have placed about $9 billion on a decline in the dollar against other major currencies. If the price is wrong, it could lead to more exchange rate volatility or further weakening of U.S. stock prices if the price is right.
According to Alex Jekov, head of G10 FX Strategy at BNP Paribas, CTA funds, key players in the August market sell-off, made big bets on a weakening dollar.
If the US employment figures come out positive this week, the dollar could strengthen, prompting investors to quickly exit short positions and hit currencies that speculators currently favor, such as the British pound.
An index of foreign currency volatility is moving back toward early August peaks.
Kit Juckes, chief FX strategist at Societe Generale, said the dollar and US equities could continue to drag each other down in the longer term because of the huge amount of money that has now flowed into Wall Street stocks from abroad, with no currency hedging in place.
“The risk for the dollar is that people are moving away from not just the dollar, but also US equities,” he said.
(Reporting by Naomi Rovnick; additional reporting by Amanda Cooper and Dhara Ranasinghe; Editing by Dhara Ranasinghe and Emelia Sithole-Matarise)
