By Amanda Cooper
LONDON (Reuters) – Global markets have kicked off the week in full selloff mode, with measures of volatility shooting up by the most on record in a single day, while equity futures and cryptocurrencies plummet, reviving memories of past crises.
There is no lone trigger for these moves, but data on Friday that showed the U.S. economy did not generate as many jobs as expected in July has been a major catalyst.
A rise in Japanese interest rates on July 31 has made bets on a cheap yen – many of which funded purchases of assets with better returns – less profitable. The unwinding of these trades has accelerated the decline across global stocks.
Tokyo’s Nikkei index finished Monday with a 12% loss, the largest one-day drop since the aftermath of “Black Monday” in October 1987, when a stock market crash stripped nearly 15% off this index and 20% off the S&P 500.
The excess volatility and the brutal nature of the selloff have prompted a number of comparisons with past market storms, – the 1987 Black Monday stock market crash, the global financial crisis of 2008, and the panic that the onset of COVID-19 lock-downs unleashed in 2020.
A VOLATILE SITUATION
The VIX index, which reflects changes in implied volatility on options on the S&P, is starting to signal distress. The index has shot up by 170% since Friday, set for its biggest one-day rise on record, after February 2018’s 115% gain on the back of spiking bond rates and the threat of a surge in inflation.
The measure, often referred to as “Wall Street’s fear index”, did not rise that much in a day during the March 2020 COVID crisis – when it posted several 40%-plus daily jumps – or even during the depths of the global financial crisis, when it rose 35% a few days after the U.S. government stepped in to bail out Wall Street.
TAKING STOCK
The S&P 500 and the Nasdaq Composite are down around 3% and 3.7% in early trading, respectively. Futures on the two indices fell between 4% and 5% before the market open. Monday’s drop marks a fairly hefty daily decline for the two indexes. The S&P has already lost 9% since hitting a record high on July 16, while the Nasdaq has shed 14% since its record high on July 11.
On Oct. 19, 1987 – the Black Monday – the S&P lost 20% in a day, while the Nasdaq shed 11.5%. During the COVID crisis, the S&P lost 12% at one point, while the tech-heavy Nasdaq fell 12%.
So the market is a long way from repeating what it has done during past bouts of turmoil.
THE HEART OF THE MATTER
The Japanese yen is the star of the currency markets right now. Years of rock-bottom interest rates in Japan encouraged investors to borrow in it in order to fund other positions in a multi-trillion dollar bet known as “carry trades”. Now that Japanese rates are rising, many of those positions are getting closed, meaning that the cash the carry trades generated to buy other assets is now exiting those markets – the technology sector is one of the standout casualties, along with cryptocurrencies.
The yen has its own thing going on, thanks in part to authorities in Tokyo stepping in to prop it up when it hit its weakest in 38 years in late July, at 161 to the dollar. It now trades around 142, having strengthened by over 7% in a week.
It has also been a traditional safe-haven asset and strengthened around 7% on a weekly basis in both 2008 and in 1998, at the height of the Asian financial crisis. But the current move is likely more linked to an interest-rate play than down to risk appetite.
The Swiss franc, a carry-trade funding currency and also a safe haven, has strengthened 4.2% since last Monday. But this kind of move is not uncommon in the currency.
GOLD, OR SILVER LINING?
Gold has come under pressure, even if it is perceived to be a safe haven. The price has risen by 16.5% so far this year and hit successive record highs. Typically, a lower U.S. rate environment favours gold, but intense volatility means it can get swept lower along with everything else.
Back in 2020, gold had been down by 3% on multiple days, while during the financial crisis, it fell by more than 7% in October 2008, as failed bank Lehman Brothers finally imploded.
Silver often moves in synch with gold, but lacks the same safe-haven appeal. It is down 5% on Monday, but, much like stocks and gold, this is a relatively modest decline compared with numerous double-digit down-days in 2020 and a near 16% fall in a single day in October 2008.
(Reporting by Amanda Cooper; Graphics by Sumanta Sen and Kripa Jayaram; Editing by Tomasz Janowski)