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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Wall Street rallies after rout, as Goldman Sachs warns correction hasn’t gone far enough – as it happened

United States Stock Market US Federal Reserve Mary Daly Inflation Interest Rates RBA the Bank of Japan
The
The "Fearless Girl" statue is seen in front of the New York Stock Exchange. Photograph: Jimin Kim/SOPA Images/REX/Shutterstock

And finally, here’s our wrap-up of today’s market moves, and warnings that the correction may not be over….

The other main European markets have struggled, though.

Despite the early optimism prompted by Japan’s strong recovery, where the Nikkei surged 10%, German’s DAX failed to rally, finishing down 0.1%, while France’s CAC lost 0.27%

Italy’s FTSE Mib also finished in the red, falling by 0.6% today, and Spain’s Ibex fell 0.3%.

But overall, the pan-European Stoxx 600 index finished 0.2% higher, with stocks in London providing a small lift.

Updated

FTSE 100 closes higher

Ding ding! The London stock market is closed, and Britain’s FTSE 100 index has posted its first rise in four sessions.

But it’s a modest recovery.

After heavy losses on Thursday, Friday and Monday, the blue-chip share index has ended today’s session 18.46 points higher at 8026, which is a gain of 0.23%.

UK engineering companies Melrose (+6.6%) and Rolls-Royce (+5.5%) are the top risers.

They’ve followed by technology investor Scottish Mortgage Investment Trust (+4.9%), which is benefitting from the rally in US tech stocks

European stock markets are staging a little late rally, as investors take some heart from the gains on Wall Street.

In London, the FTSE 100 index is now higher on the day - up 27 points or 0.35%.

Wall Street’s fear index is in retreat.

The VIX, as it’s known, is on track for one of its biggest percentage drops ever – currently down 29.84% at 27.06 points.

At one stage yesterday it surged over 60 points, hitting the highest level since early in the Covid-19 pandemic.

US economic optimism nudges up a little

Just in: economic optimism among Americans has picked up slightly this month, but investors are gloomier (something we’ve seen illustrated in recent days!).

The RealClearMarkets/TIPP Economic Optimism Index has risen by 0.7% this month to 44.5. That leaves it below the historical average of 49.1.

Optimism among investors dropped 2.2% from 53.6 in July to 52.4 in August, while it increased by 3.3% among non-investors, from 39.4 in July to 40.7 in August.

The Six-Month Economic Outlook, which measures how consumers perceive the economy’s prospects in the next six months, rose, but there was a decline in the Personal Financial Outlook, a measure of how Americans feel about their own finances in the next six months.

Confidence in the effectiveness of government economic policies also dropped.

The Dow Jones industrial average is also making a dart higher – it’s up 360 points or 0.9% at 39,064.

Wall Street recovery picks up pace

Stocks are pushing higher on Wall Street.

The S&P 500 index is now up 1%, or 51 points, at 5,237 points. Top risers include cruise company Royal Caribbean (+8%), drinks company Molson Coors (+7.5%), and Uber (+6.8%).

The Nasdaq is also picking up pace, gaining 0.9%.

Fawad Razaqzada, market analyst at CityIndex, cautions that markets are not out of the woods yet.

With a quieter US economic calendar ahead, there will be fewer new recessionary signals to unsettle traders, and the potential for supportive comments from Federal Reserve officials could ease market pressure.

For now, the greenback has rebounded, helped in part by the stronger ISM services PMI that was released on Monday. Still, in light of the recent events and expectations of a sharper pivot by the Fed than was previously expected, the dollar could weaken more broadly instead of just falling against the yen.”

JPMorgan warns carry trade unraveling is only half complete

JPMorgan has also cautioned that one of the factors driving the recent selloff has further to run.

Arindam Sandilya, co-head of global FX strategy at JPMorgan Chase & Co, told Bloomberg TV that the recent unwinding in carry trades has more room to run.

These carry trades involved borrowing cheaply in a currency such as Japan’s yen, and the buying other assets.

Sandilya points out that the yen remains one of the most undervalued currencies, despite rallying since the Bank of Japan raised interest rates last week, undermining the carry trade.

As Sandilya puts it:

“We are not done by any stretch

The carry trade unwind, at least within the speculative investing community, is somewhere between 50%-60% complete.”

Wall Street opens higher, as Goldman Sachs warns correction hasn't gone far enough

Newsflash: trading has begun in New York, and stocks are a little higher after the biggest selloff in almost two years.

The S&P 500 index, which tracks a broad swathe of the market has gained 18 points or 0.36% at the open, while the tech-focused Nasdaq is 0.4% higher.

This is a pretty muted recovery, given the S&P 500 lost 3% on Monday and the Nasdaq ended down 3.4%

The much-storied Dow Jones industrial average has opened up a mere 0.04% or 14 points higher at 38,717 points, having lost 2.6% – or over 1,000 points – on Monday.

This won’t recover much of the estimated $6.4 trillion that has been erased from global stock markets in the last three weeks.

This comes amid warnings that yesterday’s rout may not be the end of this period of volatility.

Strategists at Goldman Sachs have warned that the stock-market correction has not gone far enough.

In a new research note, Goldman have warned that valuations are still high.

Strategists led by Peter Oppenheimer told clients that Wall Street’s price/earnings ratio – a measure of how highly valued shares are – is still high.

They explained:

Has the correction gone far enough? At this stage probably not.

Valuations have moderated but remain elevated, particularly in the US. Even with yesterday’s moves (August 5), the Global equity market is up c.20% since last October lows and the Nasdaq is up 8% this year.

The current PE for the S&P 500 is still above 20x. Valuations have compressed in the sell off, but still only moderately when compared to history. The MSCI AC World has seen its 12m fwd PE move by less than 2 PE points from 18.5x to 16.5x.

Back in the City, stocks are having another wobble.

The FTSE 100 index of leading companies listed in London is now down 48 points, or 0.6%, at 7960, approaching the lows hit in Monday’s slump.

Stocks among the fallers include luxury goods maker Burberry (-4.4%), gambling group Entain (-3.1%) and specialist chemicals maker Croda (-2.3%).

European markets are also weaker, with Italy’s FTSE MIB dropping 1.2%.

Updated

Some snap reaction to the US trade data

US trade deficit drops to $73bn in June

Just in: the US trade deficit has shrunk.

The US ran a deficit in goods and services of $73.1bn in June, which is a $1.9bn drop compared with May when it hit $75bn.

The decline was due to exports rising faster than imports.

There was an increase in sales of US capital goods such as civilian aircraft, and higher exports of US fuel, while imports of industrial supplies and materials dropped.

Exports of US goods and service rose by 1.5% in the month to $265.9bn, while imports only increased 0.6% to $339bn.

Overall, the US ran a goods deficit of $97.4bn, which was partly balanced by a $24.2bn surplus in services.

Updated

In the bond markets, the yields – or interest rates – on US government bonds are rising a little today.

Yesterday, Treasury yields dropped as prices rose, with investors keen to buy safe assets.

These moves mean the US yield curve is close to “uninverting”, as they say in the bond markets. That means a return to normal conditions, where it costs more to borrow long-term than in the short term.

Inverted yield curves (where two-year Treasuries trade at a higher yield than 10-year) are often a sign that a recession is looming, tho some experts have warned that the reversal actually shows the slump is close (as the markets anticipate central banks interest rates cuts).

The euro has also weakened against the US dollar, down 0.36% at $1.0913.

Xing Gan, financial markets strategist at Exness says the US dollar is attempted to regain some ground after two sessions of decline.

Concerns about a potential US recession and significant interest rate cuts by the Fed underpinned the dollar’s decline.

Traders are anticipating a possible 50 basis point reduction in September, diminishing the dollar’s appeal. Despite a slight rebound seen in the dollar as better-than-expected US ISM services data and comments by Fed officials eased concerns, looming Fed rate cuts could see downside risks persist for the US dollar.

Updated

Yesterday’s market rout was a timely reminder that stocks can go down, as well as up…

…and that they tend to take the stairs up, and the lift down.

So says David Morrison, senior market analyst at Trade Nation, who detects an “uneasy calm” hanging over the markets today.

Morrison explains that the turbulence probably isn’t over, even though markets are currently rather calmer than yesterday:

Financial markets have steadied overnight, bringing some relief for investors following yesterday’s near melt-down.

Already, some commentators are insisting that the worst is over. Fears of a US recession are overdone, the Fed will soon be cutting interest rates (probably quite aggressively), a lot of the froth has been blown off the tech sector and investors have all unwound their yen-based carry trades painlessly. Panic over. Let’s get back to buying equities.

And the likelihood is that the bounce-back which began yesterday continues for a while. But what began last week, and what happened yesterday, should be considered a warning shot across the bows for all investors. The probability is that this isn’t over.

For a start, we have no idea how far through the carry-trade unwind we are. Then, we don’t yet know how much damage that has done to the hedge funds at the forefront of that trade. We will have to wait until September for a Fed rate cut. If they announce an emergency move before then, investors really will panic. And while fears of an imminent recession are overdone, it’s an absolute certainty that one is on its way. But as for when, who knows?

Uber beats forecasts, as growth engine hums away

Over in New York, ride-sharing firm Uber has reported better-than-expected financial results.

Uber has posted earnings per share of 47 cents for the second quarter of this year, beating analyst estimates of 31 cents.

Revenues grew 16% to $10.7bn, ahead of the $10.57bn forecast.

And net income jumped 158% in April-June, from $394m in Q2 2023 to $1.015bn.

Despite concerns about a US recession, Uber executives sound rather upbeat.

Uber’s CEO, Dara Khosrowshahi, says:

“Uber’s growth engine continues to hum, delivering our sixth consecutive quarter of trip growth above 20 percent, alongside record profitability.

The Uber consumer has never been stronger--more people are using the platform, and more frequently, than ever before--while drivers and couriers earned a new all-time high of $17.9 billion over the quarter.”

Shares in Uber have jumped 6% in pre-market trading.

Updated

Midday European catch-up

After a choppy morning, European stock markets are looking becalmed, as investors look to Wall Street for inspiration.

Here’s the state of play, after the initiall recovery from yesterday’s losses fizzled out.

  • The UK FTSE 100: up 5 points or 0.06% at 8013 points

  • Germany’s DAX: up 6 points or 0.04% at 17,345 points

  • France’s CAC: down 19 points or 0.27% at 7,129 points

  • Spain’s IBEX: down 41 points or 0.4% at 10,382 points

  • Italy’s FTSE MIB: down 30 points or 0.1% at 31,266 points

We’re still expecting Wall Street to open higher; the futures market now has the Dow Jones industrial average up 0.8% or so.

The pound remains at its lowest level in over a month against the US dollar, at $1.2698.

Luke Bartholomew, deputy chief economist at abrdn, says the current market volatility is being driven by three macroeconomic drivers.

First, weak US data reigniting recession fears. Last week’s labour market report was soft across the board, with unemployment now rising in a manner historically consistent with a recession. However, the services ISM rebounded to 51.4 in July from 48.8 previously and the PMI equivalent was even firmer at 55. And the Senior Loan Officers Survey pointed to stabilising credit conditions, although without any loosening from the sizeable tightening over the last few years. More broadly, relatively few economic data are consistent with a recession. Consumer spending and business investment were both solid through Q2, and the Atlanta Fed nowcast is tracking a 2.5% gain in Q3 GDP. Indeed, the NBER recession indictors are signalling few signs of alarm. On balance, then, while we take the deterioration in the US labour market very seriously, we don’t think the economy is in a recession.

The second, and related, driver is the sense that the Fed might be falling behind the curve in responding to weak US data. If the Fed had been meeting this week rather than last, it may well have cut rates. But this does not mean that an unscheduled meeting to announce a rate cut now is likely. In fact, such a move risks heightening volatility by creating a perception of panic. Instead, policymakers will probably try to use verbal interventions to reassure markets. For example, Chicago Fed President Austan Goolsbee was very much looking to calm nerves in comments yesterday, arguing that the employment data was just “one report”, and that the economy does not look to be in recession. We expect similar messages from other Fed speakers in due course. But what is important to stress is that the path to a soft-landing runs through rate cuts. There is a vital distinction between rate cuts that are delivered pre-emptively to stop a slowdown, and reactive rate cuts that come in response to a slowdown. The market needs reassurance the Fed is ready to deliver pre-emptive easing and will not wait until the economy is clearly in recession before cutting.

For now, we continue to forecast a 25bps cut in September, along with a clear path towards further easing this year and next. But another weak labour market report or little let-up in market stress could easily tip the Fed towards delivering a more rapid cutting cycle. We expect the Bank of England and European Central Bank to also extend their rate cutting cycles later this year, although most recent market pricing probably exaggerates the speed and scale of those cuts.

The third driver of volatility is the unwind of the yen carry trade. The Bank of Japan (BoJ) announced more monetary tightening than expected last week, causing a sharp appreciation in the yen. As the yen has been a preferred funding currency for the global carry trade, this appreciation caused a significant positioning unwind, begetting a positive feedback loop of yen appreciation. The BoJ will probably be somewhat chastened by the size of the moves in equity and currency markets. Given that the progress on underlying inflation in Japan is far from complete, it is not obvious that Japan needs a material tightening of financial conditions. So, while the unwind of the carry trade might have further to run, and we expect further tightening from the BoJ, policy rhetoric may now soften and the next hike could be delayed until much later into the year.”:

Copper continues to suffer from concerns that economic growth may slow.

Copper prices extended losses today, pulled down by worries about global growth and weak demand in China.

The three-month copper price on the London Metal Exchange (LME) has eased 1% to $8,798 per metric ton this morning, after dropping 1.8% on Monday when it hit a four-month low, Reuters reports.

Hopes of a strong bounce-back on Wall Street are also fading.

The latest futures market prices suggest we’ll only see a small recovery when trading begins in three hours.

Updated

The outlook for the UK construction sector looks to be quietly optimistic, flags Emma Fildes of Brickweaver, after July’s pick-up.

Updated

A shortage of building workers could undermine the UK construction sector’s recovery, warns Kelly Boorman, national head of construction at RSM UK:

There has been some volatility in the market, due to a lack of access to affordable funding, the impact of wet weather and ongoing labour shortages. With the availability of subcontractors falling in July, there is likely to be a tightening of labour and the supply chain due to increased activity, so there are some concerns over whether housing targets are achievable.

“To avoid housebuilding targets from becoming pie in the sky, construction needs more clarity on where labour and funding is coming from to realise housing volumes, especially businesses with plans for growth and ability to manage working capital.”

The pound is weakening on the foreign exchanges too.

Sterling has dropped by three-quarters of a cent this morning against the dollar, touching $1.27 for the first time since early July.

European markets back in the red

So much for turnaround Tuesday!

After a positive start, European stock markets have fallen into the red again.

The feeling of optimism following the sharp rally in Tokyo overnight has not lasted for long.

In London, the UK’s FTSE 100 share index is down 35 points, or 0.45%, at 7972 points – so still higher than its low point yesterday.

Germany’s DAX has lost all its earlier gains, now down 0.3%, while France’s CAC has lost another 0.6%.

Reminder, that follows a strong recovery in Asia after Monday’s rout, with Japan’s Nikkei surging around 10% – its biggest one-day jump since the financial crisis of 2008.

Updated

Eurozone retail sales fall

In less encouraging news, eurozone retail sales have fallen again.

Reail sales in the euro area dropped by 0.3% in June, new data shows, missing forecasts for a 0.2% rise.

Analysts at ING say this is “more sluggish news about the eurozone economy” as consumers postponed the retail recovery again.

Updated

Can Labour take some credit for the jump in building work last month?

Bloomberg says UK construction activity last month was boosted by “the culmination of the election that brought to power a Labour government promising to spur building”.

The pick-up in construction sector activity last month should help the sector drive UK economic growth, reckons Max Jones, director of infrastructure and construction at Lloyds Bank:

“A fifth consecutive month of growth is what contractors would have hoped for, as we move further into the second half of the year. Many contractors we speak to have been feeling upbeat and have confidence to invest in priority areas such as growth, technology, and sustainability.

“Firms will hope this investment translates into helping bolster pipelines of new work. If successful, these efforts will see the construction industry become a more important partner towards driving future growth.”

UK construction activity increases at fastest pace in 26 months

Newsflash: growth accelerated in the UK construction sector last month, at the fastest pace in 26 months.

Building firms reported “much faster increases” in both activity and new orders in July, according to the latest poll of purchasing managers by S&P Global.

Thsi lifted the Construction Purchasing Managers’ Index up to 55.3 in July from 52.2 in June, showing faster growth (50 points = stagnation).

That’s the fastest rate of expansion since May 2022.

S&P Global reports that all three categories of construction grew last month – civil engineering expanded fastest, followed by commercial work and then housebuilding.

A pick-up in housebuilding should be welcome news for the new government, as it aims to build 1.5m new homes this parliament.

Andrew Harker, economics director at S&P Global Market Intelligence, says:

“The election-related slowdown in growth seen in June proved to be temporary, with the pace of expansion roaring ahead in July. Firms saw the strongest increases in new orders and activity since 2022 as paused projects were released amid reports of improved customer confidence.

The strength of demand moved the sector closer to capacity, bringing a recent period of improving supplier performance to an end. There were also signs of inflationary pressures picking up, something that will need to be watched closely if demand strength continues in the months ahead.”

Updated

While market moves in recent days have been dramatic, it is important to keep them in the context of recent “exceptional performance” for global equities.

So says Mark Haefele, chief investment officer at UBS Global Wealth Management.

He recommends investors focus on ‘quality’ shares and bonds, which should be in demand if recession fears rose:

“We think volatility is likely to remain high in the near term, and that the Fed is likely to cut interest rates more quickly.

But we believe recession fears are overdone, and that investors should focus on deploying cash in quality fixed income, tilting equity allocations toward “quality” stocks, and diversifying portfolios across asset classes, including with gold and the Swiss franc.

Updated

The latest future prices show Wall Street is set to open higher:

Reuters reports:

  • S&P 500 E-MINI FUTURES UP 1.1%,

  • NASDAQ FUTURES UP 1.4%,

  • DOW FUTURES UP 0.7%

This is why traders are often keen to ‘buy the dip’:

Here’s Richard Hunter of Interactive Investor on this morning’s market moves in London:

After a decline of 2% yesterday, the FTSE 100 nudged ahead in early trade, with some of the largest fallers recouping part of their losses, most notably Melrose Industries, Pershing Square and Scottish Mortgage. Well received numbers from InterContinental Hotels provided another boost, while the very nature of the index, being awash with stable and established companies, may well have attracted some overseas buying interest by way of defensive positioning. Having recovered some of its poise, the premier index remains ahead by 4% so far this year, although the end to the volatile state of global markets cannot be called just yet.

The FTSE250 opened at a briskly positive pace, retracing some of Monday’s losses, to leave the index up by 3.8% in the year to date. The index also has a number of defensive plays within its constituents which, coupled with a lower risk of recession in the domestic economy than elsewhere, could also be attracting some investors in search of a relatively sheltered investment destination.”

Germany’s DAX index is leading the rest of the region higher this morning, up around 0.8%.

Energy stocks, industrial companies, utilities and tech firms are leading the risers in Berlin.

A US recession appears “inevitable” by the end of the year unless the US Federal Reserve cuts interest rates, fears Steven Blitz of TS Lombard.

However, he’s also confident that the Fed will indeed act, telling clients:

The search is on for indications that the economy is heading towards recession if the Fed fails to act sooner than later – not for indicators of recession itself.

The softening data that are rolling in are not capital crimes against growth but are problematic because a U-turn in direction is difficult when the funds rate is 100BP above the prescribed Taylor Rule and 250BP > inflation (neutral real rate is presumed to be 80BP to 120BP).

Money is expensive and a rallying 10Y [ten-year US govenment bond] is not enough to ease financial market conditions. The adage that business cycles are murdered by the Fed appears on track, yet again.

Britain’s stock market has opened higher too, but – again – it’s a somewhat subdued start.

The FTSE 100 index is up 32 points, or 0.4%, at 8040 points, which only makes a small dent in yesterday’s 166 point (2%) slide.

Engineering firm Melrose (+3.5%) are the top riser, followed by Intercontinental Hotels which beat earnings forecasts this morning.

But Rightmove is dragging the index down – off 5.7%. It told investors this morning that its contract with the UK’s largest lettings platform OpenRent will terminate at the end of this month, but reiterated its sales and profit guidance.

Updated

European stock markets are open, and moving higher!

But it’s not as large a rally as we’ve seen in Japan, at all.

The pan-European Stoxx 600 gained 0.6% at the open.

Cryptocurrencies are also recovering from yesterday’s rout.

Bitcoin’s up 2.5% at $55,810, having yesterday dropped below the $50k mark for the first time since February.

Updated

Three water firms face record total £168m fine after sewage investigation

Thames, Yorkshire and Northumbrian Water will be fined a record £168m between them for a “catalogue of failure” over illegal sewage discharges into rivers and the sea after the industry regulator’s biggest ever investigation.

The water regulator for England and Wales, Ofwat, has proposed penalties of £104m for Thames, £47m for Yorkshire and £17m for Northumbrian for failing to manage their wastewater treatment works and networks, including their operation of storm overflows. It said it was the first of more crackdowns to come.

Just in: a glimmer of hope that Germany’s economy is strengthening.

Factory orders at Europe’s largest economy jumped by 3.9% in June, official data shows, much stronger than expected.

Germany is currently on the brink of recession, after its GDP fell in the second quarter of 2024 – a manufacturing revival would certainly help.

It’s a “challenging market environment” at the moment, points out Richard Flax, chief investment officer at Moneyfarm.

But.. Flax argues the recent selloff could be an opportunity to increase exposure to equities, if the US economy avoids recession and corporate profitability doesn’t wane in the slowdown:

The assumption of a soft landing for the US economy is coming into question - raising the question of whether the US Federal Reserve has waited too long to cut interest rates.

Our base case is still for a slowdown in the US without a deep recession, but we’ll continue to monitor macroeconomic data closely. The negative returns we’ve seen over the past few days are painful, but a normal part of long-term investing. It’s worth remembering that this downturn comes off the back of an extremely strong period of overall market performance.

We think that our portfolios are fairly conservatively positioned and well-diversified, and that there’s scope to add to risky assets like equities, and we’ll continue to assess the best time and way to do that.

Here’s our news story on the recovery on the Japanese stock market:

Australia's Reserve bank leaves interest rates unchanged

Australia’s borrowers have been spared an interest rate rise as the Reserve Bank waits for more proof of a sustained drop in inflation and clearer signs of the severity of the financial markets tailspin before deciding its next move.

The central bank on Tuesday left its cash rate unchanged at 4.35% for a sixth meeting in a row. The decision was widely expected by economists after June quarter inflation largely met RBA’s forecasts and market turmoil began spreading around the world.

The RBA said inflation “in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range.

“Data have reinforced the need to remain vigilant to upside risks to inflation and the board is not ruling anything in or out,” it said, maintaining a stance it has had all year.

Analyst: there may be more pain to follow....

Matt Simpson, senior market analyst at City Index in Brisbane, cautions that there may be more turmoil ahead.

“The Nikkei’s enjoying a decent retracement against Monday’s plunge, as comments from the Fed’s (Mary) Daly and a stronger-than-expected ISM services report soothed fears of a panic Fed cut next week.

But this is not exactly a risk-on rally. And we’re not yet sure if this is just a breather between water-boardings or there is more pain to follow.

Mary Daly, the president of the San Francisco Federal Reserve, said last night she expects US interest rates will be cut later this year.

Introduction: Nikkei bounces back on turbocharged turnaround Tuesday

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

What a difference a day makes! Some 24 hour ago, the financial markets were in retreat – now, they’re bouncing back.

After its biggest crash since 1987 on Monday, Japan’s Nikkei 225 index has rebounded strongly today. The Nikkei has just closed around 10% higher, after a day of strong buying activity, recovering much of yesterday’s 12.4% slump.

The Nikkei ended the day up 3,217 points, or 10.3%, at 34,675 point..

That’s a record points gain, but below its biggest ever percentage gain of 14.2% in October 2008.

South Korea’s KOSPI index is 3.7% higher, while Australia’s S&P/ASX 200 is up a modest 0.4%.

Jim Reid, strategist at Deutsche Bank, calls it “a turbocharged turnaround Tuesday in Asia”, telling clients jovially:

On certain measures, yesterday was the wildest day of my 29-year career and will make the rides I’m going on at Disney Land Paris this time next week seem a bit like the toddler rides at Peppa Pig World by comparison.

The future market predict indicate European markets, and Wall Street, will recover ground today too.

The UK’s FTSE 100 index is being called up around 1%, after dropping 2% yesterday.

The recent stock wobble has been blamed on several factors, including concerns that a US recession is approaching. Those fears were eased somewhat by strong service sector data yesterday, showing a rebound in new orders.

Another factor is the end of the cheap money era, after the Bank of Japan lifted interest rates last week, squeezing the ‘yen carry trade’ under which investors borrowed yen cheaply to spend on other assets.

Stephen Innes, managing partner at SPI Asset Management, says several factors – including rising volatility – were to blame:

While it’s easy to blame the usual suspect—the carry trade circus—a closer look reveals that there isn’t just one villain in this story. Given the economic climate, the yen carry and other leveraged bets were indeed skating on thin ice. The Bank of Japan might have missed an opportunity to pre-signal a rate hike, and the Fed’s decision to hold rates steady didn’t exactly calm the waters. And let’s not even start on the overinflated tech bubble on Wall Street—a ticking time bomb waiting to go off.

But honestly, we’ve witnessed the perfect storm of market dysfunctions, glaringly apparent during those wild VIX surges when the market’s capacity to manage risk vanished. This was more than just a few bad calls or risky bets going south—imagine a game of hot potato with high-stakes assets, and suddenly, everyone’s hands are full. The higher the VIX, the fewer takers there are for another toss, leading to a market scenario that’s more about dodging than catching.

Chicago Fed Bank president Austan Goolsbee made an effort to calm markets yesterday, telling CNBC that it is “not looking yet like recession”, despite Friday’s slowdown in job creation.

That didn’t prevent Wall Street posting its worst drop in almost two years last night, though:

Today’s calm could be due to a stabilisation in the yen. It is trading around ¥145/$ – having surged from ¥160/$ in early July to ¥141/$ yesterday.

Traders will be looking for signs that policymakers will respond to concerns over economic growth, such as by cutting US interest rates.

The agenda

  • 7am BST: German factory orders for June 7amabrdn

  • 8.30am BST: Eurozone construction PMI for July

  • 9.30am BST: UK construction PMI for July

  • 1.30pm BST: US trade data for June

  • 3.10pm BST: RealClearMarkets/TIPP index of US Economic Optimism

Updated

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