Recent market movements - August 2024

 

Over the past few trading days, a series of weaker than expected data readings on the US labor market and the US manufacturing sector led bond markets to begin pricing in a more aggressive rate cutting cycle by the Federal Reserve. In addition, while expected by Mercer, the Bank of Japan surprised the markets with a rate hike, bringing their interest rate to 0.25%. Fear of a US recession, coupled with a global unwinding of popular trades, have triggered substantial moves in global markets.

We believe these market movements are likely attributable to three main causes; a generalised fear of the US going into recession, the unwinding of overstretched positions such as overweight US tech, and the unwinding of short Japanese yen as a carry trade. The sell-off appears to be largely technically driven, especially given the large presence of leveraged investors in these markets, which has been further amplified in August, when liquidity is generally low. However, at the time of writing (August 6th), the broad risk-off tone appears to have subdued somewhat and the sell-off embroiling markets has cooled. This is consistent with our view that the sell-off on Friday and Monday had largely been driven by fast money and short-term repositioning, rather than an outright change in fundamentals.

The Global Economics & DAA team believes that fundamentally, not a lot has changed and the latest economic data from the US and elsewhere is consistent with cooling in a soft-landing fashion. 

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13 August 2024