The Perfect Storm
Global Equity Market Impact - Global markets are reeling from the massive unwind of the Yen carry trade following the Bank of Japan's 0.25% rate hike. This action has led to the largest two-day drop in the history of the Nikkei since 1987. The situation is compounded by fears of a recession, rising geopolitical tensions in the Middle East, and Berkshire Hathaway selling 55% of its Apple shares, further exacerbating the tech sell-off.
Geopolitical Tensions - Geopolitical tensions have escalated dramatically, with Israel killing a Hamas leader and Iran vowing to retaliate. The US has responded by deploying troops to the Middle East, further contributing to the global risk-off sentiment.
Macro-Economic Data - The macroeconomic environment is deteriorating, highlighted by poor US unemployment data released last Friday. The spike in volatility has been sharp, with the VIX touching 50, a level surpassed only during the Covid-19 panic and the 2008 financial crisis. Additionally, USDJPY one-month at-the-money volatility has spiked to 16%, indicating further unwinds across various assets.
Markets continued their slide last week as SPX lost more than 2%, again led by tech as QQQ dragged more than 3% lower. Small caps lost almost 7%. The busiest week of the year did not disappoint. Overall, mega-cap earnings were fine, but not the blowout many had hoped. The Fed held interest rates steady and opened the door to a potential cut in September if the data cooperated, which the market initially cheered. However, a very weak employment report inside ISM Manufacturing on Thursday sent the recession trade flying for fear the Fed is already too late. This continued with sharp losses on Friday with another weak employment report.
Last week, the Bank of Japan raised interest rates higher than anticipated, causing a jump in their recently very weak currency. The combination of all the above sent stocks tumbling globally late last week and continuing today, with Japan's NIKKEI index shedding more than 12% on Monday alone. The Nasdaq was down 6% at one point overnight but has since recovered to a milder loss.
Volatility is likely to remain abundant as this sorts out. This week, earnings season will continue, and economic data is quite light. ISM Services was strong this morning, giving a bit of a pause on the recession assumption. Most THOR models have shifted into a more risk-off stance, Darwin models have reduced exposure to individual equities by 50%, until the dust begins to settle. Please be on the lookout for additional allocation changes throughout the week if warranted.
In my discussions with the managers of the algorithms and machine learning models that Foxstone uses, they have all said that ‘math tells us the market is due for a rebound and to stay invested because the selloff was so quick’. I am eagerly anticipating a rebound to recapture some of the losses sustained in the markets as it has been swift with over three trillion dollars lost in the past couple of weeks.
Please note I am watching your portfolios, keeping a keen eye on the movements and willing to discuss any type of alternative investment, in and out of public equities.
