Weekly Market Commentary August 5th to August 9th 2024

Last week equity markets saw the largest single day drop in two years, as the VIX volatility index, sometimes called the fear index, spiked to levels not seen since the COVID-19 crash and the 2008 financial crisis. The major headline for the decline was the unwinding of the Japanese Yen carry trade, which compounded recent weakness driven by a tense Presidential election and apparent profit-taking on mega-cap tech stocks. Simply put, a carry trade refers to borrowing foreign currency at low interest rates and investing the proceeds into securities in an alternative currency for a higher return. The associated risks include a rise in Japanese interest rates, an unfavorable move in USD/Yen conversion rates, and a sell-off in the underlying assets purchased in the trade. On Monday, all three scenarios played out, greatly altering the risk profile of the trade, causing investors to unwind by selling their high-yielding assets to cover their Yen borrowings. According to JP Morgan, 75% of the carry trade has been unwound.

Amidst recent weakness in the stock market, Treasury yields, and softer economic data, interest rate probabilities have shifted meaningfully to the dovish side. As of the time of this report, fed fund futures are projecting a total of 100bps in cuts for 2024, with 50bps expected in September.

After posting their worst decline in two years, equity markets quickly reversed, posting the best day in two years during Thursday’s trading, finishing the week mostly flat. The S&P 500 finished the week down 0.04% to 5,344, the Nasdaq down 0.18% to 16,745, and the Dow Jones down 0.60% to 39,498. U.S. Treasury yields also saw a recovery, with the 2-Year closing 16bps higher to 4.05%, and the 10-Year treasury closing 14bps higher to 3.94%.

Next week we will be focused on key data surrounding inflation, housing, and consumer spending.