Morning Brew August 6 2024

Good morning all,

Yesterday was certainly interesting and will keep commentators busy for a while. We saw a massive unwind of risk positions, leading to a severe decline  in equities, a massive rise in Yen and CHF and deleveraging across the board. In this kind of move, precious metals always suffer as well as the leveraged positions are unwound. Peter wrote a great summary on the equity side of things: The perfect storm hits market and what comes next

This morning, we are already witnessing a strong recovery: USDJPY trades at 145.70 after a low at 141.70 yesterday, the Japan 225 is up 9%, the US Tech 100 NAS +1%, GER40 +1% and Bitcoin +4% 10 Year Yields are at 3.85 and the USD Index 102.95.

EURUSD is 1.0950 and GBPUSD 1.2770, EURCHF is 0.9377 and USDCHF 0.8565. Gold and Silver so far found no real interest and are down 0.35% and -1.44%.

After yesterday’s events, traders are looking at a 50 basis points cut at the next fed meeting with a probability of 70% and 25 basis points with 30 bps.

In my view it is too early to tell if this was a real paradigm shift in markets or a bump in the road, (even a large one). Moves over the next days will need to confirm the narrative: are we heading into a recession or was it a reduction of risk?

There is little in terms of economic data in the next few days so earnings and commentary will be the most important I believe.  The next significant event is the Jackson Hole Economic Policy Symposium Aug. 22-24 and of course the middle east remains ripe with tension that could escalate at any point in time.

Trade carefully, keep your risk in check and trade carefully!

Here two very good inputs:

Koen on Volatility: In recent trading sessions and pre-market today, the VIX has surged dramatically, reflecting heightened market anxiety. With the VIX soaring and significant spikes in both the VVIX and Put/Call ratio, traders are bracing for substantial short-term market swings. Managing risk and avoiding panic selling are crucial strategies during this period of elevated volatility

Althea on Bonds:

• The recent market selloff shows that bonds are once again acting as a hedge against a stock market crash.
• With yields currently at 3.7%, bonds provide better compensation for risk and a cushion against price declines compared to pre-COVID levels when yields were 2.5%.
• With real rates among the highest in 17 years, policymakers have ample room to implement rate cuts, which further supporting bond prices in case of a crisis
• If the anticipated crisis does not occur, markets will need to adjust their current expectations for interest rate cuts, causing Treasury yields to rise. To mitigate these risks, we prefer limiting duration exposure to bonds with maturities up to five years.

Tuesday

• Data: Australia Rate Decision, Swiss Retail Sales Germany Industrial Orders
• Speakers: Blinken
• Earnings: Uber, Caterpillar, Rivian, Airbnb, Reddit

Wednesday

• Data: Germany Industrial Production, China Trade
• Earnings: Shopify, Walt Disney, Novo Nordisk, Sony, Robinhood

Thursday

• Data: US Initial Jobless Claims
• Speakers: Barkin
• Earnings: Lilly, Paramount, The Trade Desk

Friday

• Data: China CPI, PPI
• Earnings: Nikola