Global financial markets experienced excessive volatility over the course of the trading day yesterday as changes in risk sentiment and underlying fundamentals led to a sharp unwinding of positions. The catalyst for these moves really started in earnest last week when we had some major macroeconomic updates, including a hike from the Bank of Japan, a hold from the Federal Reserve, and weaker US data prints, including a big downside surprise in Non-Farm Payrolls.
The big change has really occurred in investors’ outlook on the US economy, having moved swiftly from the ‘soft landing’ narrative to possible recession in just a few days, with some market participants calling for an intra-meeting Fed rate cut to steady markets. The market is now pricing in a 70% chance of a 50-basis point cut from the Fed in September, with investors hoping that this will appease the market and bring back a more positive sentiment.
Japanese markets suffered from huge position unwinds yesterday in both the stock markets and in FX. Japanese stocks suffered their biggest single-day loss since the 1987 Black Monday event, with the benchmark Nikkei dropping 12.4%, causing alarm across Japanese trading floors. Despite a strong rally back today, traders remain concerned about further downside risks.
Moves in FX were sharp as large carry trades—where traders hold the currency that pays higher interest rates against a low-interest rate currency, e.g., the Yen—came under further pressure. They had already seen big moves south in the last few weeks after intervention from Japanese authorities. The BOJ rate hike and haven flows pulled the Yen back from multi-decade lows against a range of currencies, but yesterday was about large positions bailing at any level possible. Again, we have seen a bit of a retrace in the market in trading today, but traders remain wary of any further spikes in the Yen that could trigger more momentum plays.
Overall, markets remain very sensitive to any negative updates, and most traders are now favoring a ‘sell the rallies’ mentality as opposed to the ‘buy the dips’ narrative that has added to global indices hitting all-time highs over the last few months.
