August 05, 2024

“Last week’s non-farm payrolls report was something of a watershed moment for markets, and volatility has skyrocketed this morning as investors position for a potential US recession.”

Tim Hallinan – Trading Director

Main Headlines

Stock markets have descended into panic this morning, led by a selloff in tech, as a spike in US recessionary fears and bets on rapid Federal Reserve rate cuts triggered a 13% crash in Japan’s Nikkei 225 and a 2% fall at the open in Europe. These moves are very likely to spill over into the US session, where Nasdaq futures have fallen 6%. The VIX volatility gauge spiked on Friday to its highest since the height of the pandemic in 2020.

Prime Minister Keir Starmer is facing one of his first major challenges after urther riots swept across the UK over the weekend in the most widespread violent disorder for 13 years, following the incident in Southport early last week. Cities including Liverpool, Bristol, Hull, and Belfast saw violent protests that Starmer condemned as ‘far right thuggery’.

GBP

A rapid rise in cross-asset volatility has appeared to spill over into sterling trading this morning, with the pound both dipping by 0.7% and then retracing the entire move in the space of two hours. With markets descending into panic about the possibility of a sharp US economic slowdown this morning, it is developments across the Atlantic that will be key for sterling today. The 2-year yield differential has moved around 28bps in the pound’s favour since early last week, despite a Bank of England rate cut, and now it’s the pound’s risk sensitivity that is preventing it from taking advantage. The final services PMI this morning is likely to be glossed over by markets as traders keep their eyes glued to global developments.

EUR

The euro has surged around 1.2% against the dollar since the softer-than-expected US jobs numbers on Friday. A big pickup in expectations for Federal Reserve rate cuts on Friday compressed the yield differential between two-year Bunds and Treasuries to the tightest levels since July 2023. Souring sentiment about the risks to global growth had held back some of the potential gains from that move, but the single currency does appear to be reconnecting these spreads this morning and has gained 0.4%. The data this morning is relatively euro-focused, with the final services PMI, the Sentix investor confidence survey, and the July PPI report.

USD

Friday’s weaker-than-expected non-farm payrolls report has rapidly intensified a risk-off trade that had begun on signs of a US economic slowdown, concerns about growth in China, earnings disappointment for Q2, and an unwind of the carry trade. The US economy added only 114K jobs in July – far less than the 176K expected – and this significantly raised fears that a non-linear deterioration in the labour market could fuel a severe growth slowdown. Market pricing is increasingly arguing that the Fed is well behind the curve and has lost its opportunity for proactive rate cuts, with a 50bps double cut in September now implied at a 70% probability and 120bps expected by the end of the year as the Fed catches up with its missed chance in July. Traders have hugely reassessed positioning on US rates in both the short and long term – the 50bps fall in the 2-year Treasury yield last week is a move comparable to Covid, the Global Financial Crisis, and 9/11, and the terminal rate has been repriced downwards to around 3%. The dollar index has fallen by 1.2% since the release, but a safe haven bid has prevented a deeper decline. Whether this move sticks will largely depend on what the Fed has to say today and the ISM services PMI this afternoon. Goolsbee and Daly both speak, and they may wish to dampen some of the volatility with words of calm. The ISM services report slumped to a four-year low in June, and another markedly weak employment subindex could take the dollar a notch lower.

Markets

Equity losses are mounting as risk-off moves snowball and traders are closing positions amid collapsing optimism around a US economic soft landing. The VIX – the ‘fear gauge’ – doubled on Friday and spiked again this morning to the highest levels since June 2020. Cryptocurrencies and gold are among the other assets being dumped.

Main Economic Events (All Times CET)

10:00am: Eurozone Final Services PMI
10:30am: Eurozone Sentix Investor Confidence
10:30am: UK Final Services PMI
11:00am: Eurozone PPI
3:45pm: US Final Services PMI
4:00pm: US ISM Services PMI
11:00pm: Fed’s Daly speaks

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