Friday, August 9th, 2024, marked a somewhat stabilizing day for the US stock market, concluding a week characterized by significant volatility. After experiencing both its best and worst days since 2022 earlier in the week, the market managed to close with modest gains.
Weekly Market Performance
The S&P 500 and Nasdaq Composite both added 0.5%, while the Dow Jones Industrial Average edged up 0.1%. This helped to mitigate the week’s losses, with the S&P 500 ending slightly down and the Dow and Nasdaq posting minimal declines.
Key Events Driving the Market
Japanese Stock Market Turmoil
Monday saw the biggest intraday decline in Japanese stock markets since 1987. This was largely attributed to the unwinding of the Yen (JPY) carry trade, where investors borrow in JPY at low interest rates and exchange it for higher-yielding currencies like the US Dollar and Mexican Peso.
It is believed that much of the recent Tech rally was financed by this carry trade. The unwinding began when Bank of Japan (BOJ) raised interest rates for the first time since 2008, with indications of more to come.
On Tuesday, the BOJ attempted to calm the markets by stating that it would not raise interest rates further if market instability persisted. This announcement triggered a recovery in Japan, the carry trade, and US stock markets.
US Economic Data
Thursday’s jobless claims came in better than expected, sealing the deal for another push higher, leading to a near-unchanged week for the market.
Bond Market Volatility
The bond market also saw similar volatility, with the 2-10 year yield curve briefly dis-inverting . A higher 10-year yield compared to the 2-year suggests that a recession may be on the way, prompting varied reactions in the markett.
Many initially predicted a 50-75 basis point rate cut in September following Monday’s sell off. However, as the markets stabilised, swaps now predict 100 basis point cut for the year, with a 60% probability of a 25 basis point cut in September.
Weekly Performance Recap
For the week:
- The S&P 500 slipped -0.04%.
- The Nasdaq Composite retreated -0.2%.
- The Dow Jones fell -0.6%.
Friday’s Closing Levels:
| Index | Close | Change | % Change |
| Dow Jones | 39,497.54 | +51.05 | +0.13% |
| S&P 500 | 5,344.16 | +24.85 | +0.47% |
| Nasdaq Composite | 16,745.30 | +85.28 | +0.51% |
| US 10-Year Yield | 3.94% | ||
| VIX | 20.37 | -0.42 | -14.38% |
Market Outlook: Where Do We Go From Here?
Technical Analysis
Various sources offer conflicting technical analysis. Both the S&P 500 and Nasdaq stopped short of their 10-day moving averages. The low trading volume during the recovery suggests it may not be sustainable.
Some analysts believe the market may have found a bottom and could test new highs, particularly in the Nasdaq. Others recommend selling into strength, predicting that the selloff isn’t over and that the Nasdaq 100 could drop to 16,800-17,000, which may present a good buying opportunity.
Economic and Geopolitical Risks
While soft economic data has emerged, the risk of a recession still seems less likely than a soft landing. Overall, earnings have been slightly better than expected, and the economy continues to hold up well.
Geopolitical tensions, particularly in the Middle East, pose additional risks. Reports of a drone attack on a US base and the subsequent deployment of F-18s to the region, along with threats from Iran to attack Israel in retaliation for the assassination of Hamas leader Ismail Haniyeh, could weigh heavily on the market.
Upcoming Data
This week, inflation data will be crucial in determining whether the Fed opts for a 25 or 50 basis point cut in September. While a September rate cut seems almost certain, the size of the cut is still in question. Even if CPI comes in below expectations, a 50 basis point cut seems unlikely.
Market Flows
Recent market flows near the lows suggest that many shorts have taken profits or that new buyers are coming in, potentially setting the stage for new highs.
CTA (momentum traders) who were previously neutral are beginning to build long positions again. However, the unwinding of the Yen carry trade—and by extension, the tech rally—may not be over.
Volatility and Risk Management
Taking all this into consideration, the VIX closing around 20 last week indicates that more volatility could be on the horizon, though it’s unlikely to spike back into the 60s. If the VIX drops back into the 12-15 range, it would suggest that fear has dissipated, likely leading to higher prices. However, if panic selling resumes, the market could deteriorate rapidly.
Let’s hope we avoid another round of panic selling—if we don’t, things could get ugly fast.
Source: CBOE, Bloomberg
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Disclaimer
This information contained in this blog is for general reference only and is not intended as investment advice, a recommendation, an offer, or an invitation to buy or sell any financial instruments. It does not consider any specific recipient’s investment objectives or financial situation. Past performance references are not reliable indicators of future performance. Doo Prime and its affiliates make no representations or warranties about the accuracy or completeness of this information and accept no liability for any losses or damages resulting from its use or from any investments made based on it.
The above strategies reflect only the analysts’ opinions and are for reference only. They should not be used or considered as the basis for any trading decisions or as an invitation to engage in any transaction. Doo Prime does not guarantee the accuracy or completeness of this report and assumes no responsibility for any losses resulting from the use of this report. Do not rely on this report to replace your independent judgment. The market is risky, and investments should be made with caution.
