August 06, 2024

“Yesterday’s historic spike in market volatility reverberated across the financial markets and handed a boost to the safe-haven currencies. A modest reversal of these large moves has been the trade this morning, but there is a lot of uncertainty in the medium term.”

Sam Cornford – Head of Trading

Main Headlines

The VIX stock market volatility index – commonly referred to as Wall Street’s fear gauge – had its biggest one-day rise in history yesterday in its third highest spike ever recorded as US recessionary fears triggered a colossal position unwind that spread across financial markets. The Japanese stock market saw its biggest drop since Black Monday in 1987 and indices across the US and Europe fell between 2 and 4%. Deutsche Bank’s FX volatility gauge – the CVIX – spiked to a 15-month high.

Iranian President Masoud Pezeshkian pledged yesterday that Tehran would retaliate against Israel for the assassination of Hamas’s Ismail Haniyeh, although reiterated that he was not looking to escalate the region’s conflict.

GBP

A choppy trade in GBP/USD reflected investor unease yesterday, with sterling ultimately ending lower as it seemingly continues to suffer from last week’s rate cut. GBP/EUR also touched its lowest point since mid-May, having fallen 1.8% since the Bank of England decision. The BRC retail sales monitor printed as expected this morning at 0.2% year-on-year, and the construction PMI this morning is expected to have improved but is unlikely to give the pound a strong impulse for recovery.

EUR

EUR/USD touched 1.10 for the first time since the beginning of the year yesterday amid a dollar selloff catalysed by an aggressive rate cut repricing. That offset any would-be risk-on strength for the greenback, although the same could not be said for the other safe havens, with EUR/CHF briefly falling yesterday to its lowest level since 2015 when the SNB abandoned the peg and caused a crash. German factory data this morning surprised to the upside for the first time since December – orders grew in June for the first time this year, rising 3.9%. Retail sales at 10am CET are expected to have stagnated, and it’s likely to be risk dynamics and US rate cut bets that remain in the driving seat in FX today.

USD

The dollar is on the front foot this morning after Fed speakers and a positive ISM services print helped to temper apocalyptic bets on the US economy. Yesterday’s moves in rates and equities were extremely aggressive, with markets at one point implying a 60% chance that the Fed would swoop in with an intermeeting rate cut within one week, and a 100% chance that 50bps of easing would arrive by the September meeting. While much has been said about the part played by the flushing out of the yen-funded carry trade in intensifying the move lower in equities and in denting risk sentiment, it’s admittedly very difficult to get a clear view on actual shifts in market positioning. Each move – the falls in Treasury yields, the dollar, and equities – looks set to be reversed at least in part today, and undoubtedly yesterday’s rebounded 51.4 ISM services PMI print and Goolsbee’s assurances that the Fed would not react to a single soft data point are behind much of the cooled panic. The data calendar is light today and investors may take the opportunity to add back some risk in the short term, now that markets have stabilised.

Markets

Japanese equities have recovered by almost 10% from their trough yesterday and futures are pointing upwards for the open in Europe and the US, as markets reassess positions following a strong ISM print in the US yesterday and calming words from Fed officials.

Main Economic Events (All Times CET)

1:01am: UK BRC Retail Sales Monitor
6:30am: Reserve Bank of Australia Policy Decision
7:45am: Swiss Unemployment Rate
10:30am: UK Construction PMI
11:00am: Eurozone Retail Sales

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