The US equity markets experienced a downturn this week, heavily influenced by a significant sell-off on Monday. This sharp decline overshadowed gains attributed to relatively robust economic data and encouraging remarks from the Bank of Japan's (BOJ) Deputy Governor Shinichi Uchida regarding the yen carry trade. The Dow Jones Industrial Average closed at 39,497.54 on Friday, a drop from 39,737.26 recorded a week earlier.
Similarly, the Nasdaq Composite ended at 16,745.30 compared to 16,776.16 the previous week. The S&P 500 also saw a slight decline, closing at 5,344.16, down from 5,346.56. Sectors such as energy, technology, and financials were pivotal this week as leaders in the market. At one point during intraday trading on Monday, the Nasdaq plummeted more than 1,000 points.
This high volatility was reflected in the CBOE's Volatility Index (VIX)—a well-known gauge of market fear—soaring by 80%. This surge was incited by fears that the anticipated interest rate cuts in September and beyond could signal an impending recession. Using the FedWatch Tool, the likelihood of a 50 basis point cut was pegged at 86% by Monday afternoon, a notable increase from 74% the previous day and a stark rise from the mere 11% just a week prior.
Furthermore, the market indicated a potential 100 basis point cut on the horizon, illustrating the pervasive panic among investors. Countering such alarming market sentiments, subsequent macroeconomic data did not corroborate fears of a recession. In fact, the US initial jobless claims fell by 17,000 to 233,000 for the week ending August 3.
This represents a decrease from an upwardly revised prior figure of 250,000, exceeding analysts' expectations which had anticipated a smaller reduction to 240,000 as per a survey by Bloomberg. On another front, comments from BOJ Deputy Governor Shinichi Uchida on Wednesday stating that the central bank would refrain from hiking rates amidst market volatility contributed to a depreciation of the yen.
This shift in sentiment positively impacted market psychology, as reported by Reuters. Contrarily, the BOJ’s unexpected rate increase on July 31 reportedly triggered global market turbulence on Monday by inciting an unwinding of the yen carry trade, a commonly utilized trading strategy involving low-interest-rate currencies. Meanwhile, Treasury yields showed signs of recovery following Monday's sharp decline, with both the 10-year and two-year yields expected to conclude higher compared to last Friday's rates. Overall, the volatility in the stock markets this week underscores a precarious balancing act between the potential for economic growth and the looming fears of recession, as volatile trading conditions continue to put investor sentiment to the test..