The market mood continues to improve after an early washout.
US traders have steadied the market after the worst day in Japanese stock market history. The market is trying to make sense of an unwind of the carry trade and rapid, broad deleveraging into an uncertain economy.
Helping the situation today was a pair of US economic indicators that showed a steady services sector. The Fed’s Goolsbee also projected calm and a steady hand, perhaps helping.
At some point, these moves are entirely emotional and overshoot because of leverage and options but some strong hands have waded in. US Treasury yields are now higher on the day out to 10s and the Nasdaq has more-than halved its decline. S&P 500 futures are down 2.4%.
Spoos daily
In commodity markets, gold has retraced about half of its loss while oil is back to flat on the day.
Bitcoin was one of the first things to move and is still deeply negative but has made some headway, bouncing from $49,450 to $54,320.
I wonder if some greed starts to creep in here. There is such a knee-jerk reaction to buy dips in tech that’s hard to snuff out. On Friday, I wrote about why it’s hard to make the ‘hero trade’ now. That was good advice and I’ll re-up the four reasons I highlighted:
- Year-to-date gains have
been great. Most assets are up meaningfully this year and fund managers
are sitting on +15% gains. Do you really want to risk that in August?
You can buy a five-month t-bill and tease out another 2% from the
sidelines, then re-assess in early 2025. - Liquidity
is hard to come by. I think this is increasingly a problem. There is so
much algo trading, leverage and crowding that when the dance stops,
there is no one left to buy. That’s leading to unusually large moves in
the biggest stocks and in bonds. - Seasonals
are tough in Aug/Sept. Even if you don’t want to wait out the whole
year, that’s a good case to take a breather here and tune into the
Olympics instead. - Fed pricing is aggressive.
Should the Fed cut 50 bps at the next two meetings? Yes. Will they? I
think the probabilities in the market are too high. The Fed will be
stubborn, as comments from Barkin and Goolsbee indicated.