By Naomi Rovnick
LONDON (Reuters) – Rising concerns about the U.S. economic outlook and a month of seasonal declines in stocks have created a new perfect storm of volatility in global markets, sending investors scrambling for cover and fearing a new round of currency chaos.
After a rapid recovery in risk assets such as stocks and high-yield bonds after a chaotic fall in early August, traders lost their short-lived optimism that U.S. interest rate cuts would support growth.
Instead, they already appear to be ahead of Friday’s U.S. jobs data, which could repeat last month’s weak report, with Tuesday’s weak U.S. manufacturing data triggering further selling.
Wall Street’s S&P 500 stock index fell more than 2% on Tuesday, while Japan’s Topix stock index plunged 3.7% on Wednesday, its biggest daily drop since the Aug. 5 stock market rout, and European stocks tumbled.
Meanwhile, the VIX index of expected volatility in U.S. stocks hit its highest level in a month, as choppy currency trading threatened the dollar and other safe-haven currencies.
“Markets were facing uncertain inflation but growth has held up,” said Florian Ielpo, head of macroeconomics at Lombard Odier. “This situation seems to be changing, the new uncertainty is about the extent of the slowdown.”
EVACUATION
The shaky start to September follows a global rout in early August, as a rise in Japanese rates and U.S. jobs data destroyed popular carry trades betting against the yen.
Highly valued technology stocks that have been attracting investor attention have been hit hard in August. Artificial intelligence giant Nvidia fell 9.5% on Tuesday, the biggest single-day stock price drop ever for a U.S. company. Dutch semiconductor equipment supplier ASML Holdings fell about 5% on Wednesday.
“One of the big risks is that the market is concentrated and it only takes one of these big tech names to be volatile for it to ripple through the entire market,” said Justin Onuekwusi, CIO of investment firm St. James’ Place.
The restructuring follows investor unease that stocks and bonds started September with different stories – stock markets had anticipated robust corporate earnings while government debt rallied in anticipation of sharp U.S. rate cuts and the risk of recession.
“You have to decide now whether you prefer credit and bonds or stocks,” said Lombard Odier’s Ielpo, who added that he had been buying government bonds for the past four weeks.
The yield on 10-year U.S. bonds, around 3.8%, has been falling for four months. The yield on German Bunds fell further on Wednesday from the one-month highs reached on Monday.
BCA Research recommended selling stocks and buying bonds.
“We assign a high probability to a tipping point into a recession,” he said in a client note.
The Federal Reserve is expected to cut rates for the first time since 2020 on September 18, with money markets now pricing in a 43% chance of a 50 basis point cut to its benchmark rate of 4.5%-4.75%.
A broad index of high-yield corporate bond performance has also risen 2.5% since…
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