- The S&P 500 lost over 8% of its value due to the panic amid recession concerns.
- Most carry-trade investors sold off their dollar assets after the BoJ hike.
- US inflation might hold steady at 3.0% on an annual basis.
Equities fell slightly on Monday but made new highs as fears of a US recession eased. At the same time, market volatility decreased as panic reduced and investors focused on the upcoming US inflation reports.
The panic and fear that caused turmoil in the US equities market have recently subsided. US policymakers have called for calm and indicated that the likelihood of a recession remains low. At the same time, data since last week has shown resilience in the economy, reducing fears of a rapid slowdown.
After the US nonfarm payrolls report, investors were convinced that the Fed had delayed too much to lower borrowing costs. Therefore, despite increased Fed rate cut expectations, equities fell as recession fears soared.
S&P 500 (Source: Bloomberg)
Notably, the S&P 500 lost over 8% of its value in that short period, wiping out most of its yearly gains. Nevertheless, the index is still up 12% for the year. Most of these gains came as markets gradually increased the likelihood of a Fed rate cut in September. At the same time, most companies reported better-than-expected earnings.
However, the trend reversed when it became clear that the economy was plunging. The unemployment rate jumped, and most second-quarter tech earnings were lackluster.
Meanwhile, experts believe some of the moves came from a widespread unwinding of the yen-dollar carry trade. For a long time, the yen has suffered amid low interest rates in Japan. Meanwhile, the US dollar has enjoyed a long period of high interest rates. As a result, investors have borrowed a lot of the yen at low rates and invested in dollar assets that yield more, including US stocks.
However, the Bank of Japan has made an about-turn and started tightening monetary policy. At the last meeting, the central bank hiked rates by 25bps, reducing the rate gap between Japan and the US. Consequently, most carry-trade investors sold off their dollar assets, leading to a sharp sell-off.
As calm returns, market participants will return their focus to the outlook for Fed rate cuts. The next major report is the US CPI. Inflation might hold steady at 3.0% on an annual basis. However, on a monthly basis, it could increase by 0.2%. Fed policymakers said the Fed would cut rates in September if inflation met expectations.
