A Look at the Day Ahead in US and Global Markets by Mike Dolan
Whether the prospect of a US recession is real or imaginary, the return of the discussion alone is enough to send global stock and bond yields reeling, as doubts about AI and a Japan-induced volatility spike swept through the holiday-battered month of August.
And as with many previous global sell-offs, there is a risk of a self-perpetuating spiral, amid a feverish search for “safe” bonds as speculation mounts over hasty and dramatic rate cuts.
News over the weekend that Warren Buffett’s Berkshire Hathaway has fallen on hard times in its stock market, raising nearly $277 billion in cash and selling off about half its stake in Apple, suggests the 93-year-old beloved investor is concerned about the broader U.S. economy and stock market valuations.
Shares of both Apple and AI leader Nvidia fell nearly 10% ahead of Monday’s trading bell.
And because Japanese stocks have been one of Buffett’s best investments of the past year, that has rattled an already nervous Tokyo market.
After a hectic week last week, Monday saw the biggest stock market drop in Japan since the crash of 1987. The benchmark Nikkei fell by more than 12%.
Japan, of course, has a story of its own: it was one of the hottest stock markets of the past year, but it was fueled by a plummeting yen that authorities have been trying to prop up for months.
And in a classic case of “be careful what you wish for,” months of official yen-buying interventions and the Bank of Japan’s second rate hike of the year last week have finally paid off — but it has blown the stock market away in spectacular fashion.
And the yen’s swings have caused unrest around the world. As interest-rate “carry trades” financed by cheap yen loans have been a lucrative bet among speculative funds for the past two years, the yen’s sudden rise — which hit a one-year high on Monday — and the associated spike in volatility have sent shockwaves through these and other “risk” trades.
Concerns were again palpable on global markets on Monday, with South Korea and Taiwan both down 8% and European benchmarks falling more than 2%.
And it’s going to be a tough opening on Wall Street.
With the Nasdaq already in correction territory after last week’s decline, futures are pointing to further losses of around 4% on Monday and S&P500 futures are down 2.5% heading into the stock market bell.
The VIX “fear index” of U.S. stock volatility soared — surpassing 40 for the first time since pandemic lockdowns began in 2020. Reflecting a reversal of risky bets, Bitcoin fell 15% from Friday’s levels, the Swiss franc rose to its best level of the year — but gold, oddly, fell.
The dramatic fall in US stock prices last week coincided with a noisy and somewhat disappointing earnings season for Big Tech companies. Investors fear that too much is being spent on artificial intelligence and that there is no end result yet.
But the biggest change was the return of concerns about a US recession to a market that had overwhelmingly priced in a “soft landing” for the economy after a series of weak updates on manufacturing and the labor market.
If previous examples of the speed at which unemployment is rising in the US hold true — and many think that continued disruptions in the post-pandemic labor market mean they don’t — then Friday’s so-called “Sahm rule” recession flag was a moment.
Even though the rule’s author, former Federal Reserve economist Claudia Sahm, has downplayed the warning this time around, calculating a half-percentage point increase in the average unemployment rate over the past three months above last year’s low is a warning nonetheless.
So much so that the interest rate markets have become confused.
Fed futures markets are now expecting a half-point cut in the Fed rate as early as next month and a 125 basis point cut by the end of the year.
JPMorgan Now expects the Fed to cut rates by 50 basis points at its September and November meetings, followed by 25 basis point cuts at each meeting thereafter.
With the US 3-, 10- and 30-year auctions this week, Treasury yields and the dollar have tumbled. US 10-year yields fell below 3.7% for the first time in over a year and have already fallen by around 50 bps this month.
Two-year yields fell as low as 3.69% and the two-to-10-year curve rose to near positive territory for the first time in two years. Some see this as a warning sign of an impending recession after two years of inversion.
The dollar index hit its lowest level since March amid hyped talk of Fed easing.
Of interest now are the US services sector talks later today, a reality check from Fed speakers and also the release of the Fed’s quarterly survey of senior credit officers.
Key developments that should provide more direction for US markets later on Monday:
* U.S. July Service Sector Surveys by ISM and S&P Global. Fed Senior Loan Officer Quarterly Survey
* Mary Daly, chair of the San Francisco Federal Reserve, speaks
* US Corporate Earnings: Tyson Foods, CSX, ONEOK, Diamondback Energy, Realty Income, Simon Property, Williams
* US Treasury sells 3, 6 month bonds
(By Mike Dolan, editing by Mark Heinrich; mike.dolan@thomsonreuters.com)
