LONDON,– Growing concerns over the U.S. economic outlook and a traditionally weak month for stock performance have triggered another wave of global market volatility, leaving investors seeking protection and fearing potential currency instability.
After a brief recovery in risky assets like stocks and high-yield bonds following a turbulent selloff in early August, traders are now losing confidence in the prospect of U.S. interest rate cuts bolstering economic growth. The optimism that briefly buoyed markets has faded, with weak U.S. manufacturing data on Tuesday leading to renewed selling pressure ahead of crucial jobs data expected on Friday.
On Tuesday, Wall Street’s S&P 500 index dropped more than 2%, while Japan’s Topix index suffered a 3.7% decline on Wednesday, marking its steepest fall since the August 5 market selloff. European stocks also tumbled in response, contributing to the global downturn.
Adding to investor anxiety, the VIX index, which measures expected U.S. equity volatility, has surged to a one-month high as erratic currency trading raised concerns about the dollar and other safe-haven currencies. “Markets were dealing with uncertain inflation, but growth was resilient,” noted Florian Ielpo, head of macro at Lombard Odier. “Now, the uncertainty is how deep the slowdown will be.”
September Shakes Markets as Tech Stocks Plunge
The shaky start to September follows the global market turmoil seen in early August, which was sparked by a surprise rate increase in Japan and disappointing U.S. jobs data. Popular carry trades, betting against the yen, were particularly hard-hit.
Echoing the market’s earlier struggles, highly valued tech stocks have been especially impacted. Nvidia, a leading player in artificial intelligence, saw its stock plummet by 9.5% on Tuesday, marking the largest single-day market value loss for a U.S. company. Meanwhile, Dutch semiconductor equipment firm ASML Holdings fell by about 5% on Wednesday.
“One of the big risks is that market concentration in tech stocks means volatility in one big name can affect the entire market,” said Justin Onuekwusi, Chief Investment Officer at St. James’ Place.
Diverging Market Narratives Fuel Investor Uncertainty
The market shakeout reflects investor unease as equities and bonds appear to be telling different stories. While equity markets had priced in strong company earnings, government debt rallied on the expectation of deep U.S. interest rate cuts and increased recession risks.
Investors are now faced with a choice between credit, bonds, or equities. Florian Ielpo of Lombard Odier revealed that he has shifted towards government bonds over the past month. U.S. 10-year bond yields, currently around 3.8%, have been declining for the past four months, while German Bund yields have also eased from recent peaks.
BCA Research has advised selling equities in favor of bonds, citing a high probability of a recession tipping point. Market speculation suggests the Federal Reserve could cut rates for the first time since 2020 on September 18, with a 43% chance of a 50-basis-point reduction to 4.5%-4.75%.
Currency Market Jitters Add to Uncertainty
In the currency markets, traditional safe-havens like the dollar are facing uncertainty as traders question whether the dollar will retain its usual appeal amid global selloffs, or whether fears of a U.S. recession will undermine it.
Short-term speculators have bet around $9 billion on the dollar falling against other major currencies, a position that could lead to significant foreign exchange volatility if proven wrong. This could either weaken U.S. stocks further or amplify the dollar’s decline.
Trend-following funds, which played a key role in August’s market selloff, have placed large bets on a weakening dollar. However, if upcoming U.S. jobs data surprises on the upside, the dollar may strengthen, prompting a rapid exit from short positions and impacting other currencies like the British pound.
Over the longer term, some analysts, including Societe Generale’s chief FX strategist Kit Juckes, warn that the dollar and U.S. stocks could drag each other down, particularly as significant amounts of foreign capital have flowed into Wall Street without currency hedging. “The risk for the dollar is that people not only move away from the dollar but also exit U.S. stocks,” Juckes cautioned.
Source: Reuters