"$6.4 Trillion Stock Wipeout Has Traders Fearing \u2018Great Unwind\u2019 Is Just Starting"

" $6.4 Trillion Stock Wipeout Has Traders Fearing \u2018Great Unwind\u2019 Is Just Starting \r\n The numbers flashing on trading screens on Monday were shocking even to market veterans. \r\n In Tokyo, the Nikkei was down 12%. In Seoul, the Kospi sank 9%. And when the opening bell rang in New York, the Nasdaq plunged 6% in seconds. Cryptocurrencies sank; the VIX, a gauge of stock market volatility, skyrocketed; and investors piled into Treasury bonds, the safest asset of them all. \r\n Whether Monday\u2019s wild gyrations mark the final bang of a global selloff that started to build last week or signal the beginning of a protracted slump is impossible to know. On Tuesday, some of the worst-hit markets rebounded with key gauges in Japan soaring more than 10%, though few were saying a bottom had been reached. \r\n One thing is clear: the pillars that had underpinned financial-market gains for years \u2014 a series of key assumptions that investors across the world were banking on \u2014 have been shaken. They look, in hindsight, a bit na\u00efve: the US economy is unstoppable; artificial intelligence will quickly revolutionize business everywhere; Japan will never hike interest rates \u2014 or not enough to really matter. \r\n Rapid-fire, evidence poured in over the past couple weeks that undermined each of them. The July jobs report was feeble in the US. So too were Big Tech\u2019s AI-driven quarterly earnings. And the Bank of Japan hiked rates for the second time this year. \r\n The one-two-three punch jolted investors into suddenly seeing the peril inherent in, say, bidding Nvidia Corp. shares up 1,100% in less than two years or loading up on junk-rated loans bundled into bonds or borrowing money in Japan and plowing it into assets paying 11% in Mexico. In the span of three weeks, some $6.4 trillion has now been erased from global stock markets. \r\n \u201cIt\u2019s the great unwind,\u201d said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. In the vernacular of traders, trying to pick the right moment to buy an asset that\u2019s tumbling is like trying to catch a falling knife. Today, Varathan said, \u201cthere are falling knives everywhere.\u201d \r\n A market panic like this creates risks big and small. Most prominent among them: the selloff, if left unchecked long enough, could muck up the gears of the financial system, slow lending and act as the final straw that tips the global economy into the recession that many now fear. \r\n That prompted calls for the Federal Reserve to start cutting interest rates \u2014 perhaps, some argued, even before the next scheduled policy meeting in September. In the bond market, the rush into shorter-dated Treasuries briefly drove yields on two-year notes below those on 10-year bonds for the first time in over two years. Known as a disinversion, that flipped the yield curve back to its usual shape again \u2014 a shift that\u2019s typically seen as a sign of an imminent recession. \r\n For Ed Yardeni, an economist who\u2019s closely tracked markets for half a century, the sudden collapse in markets brought back memories of Black Monday in 1987 \u2014 a one-day plunge that shaved 23% off the Dow Jones Industrial Average. It was scary but, Yardeni notes, ultimately not a harbinger of economic doom. \r\n Back then, \u201cthe implication was that we were in or about to fall into recession and that didn\u2019t happen at all,\u201d Yardeni, who runs Yardeni Research, said on Bloomberg TV. \u201cIt had really more to do with the internals of the market. I think there\u2019s the same thing going on here.\u201d \r\n Markets have been rocked by premature recession fears during the current bull market, too. They flared early last year during a short-lived banking panic, only to fade away almost as quickly when the US economy kept powering ahead. The stock market also bounced back strongly from the drubbing it took in 2022 to hover at record highs this year. \r\n But the shift in sentiment across the globe has been stark in recent days, shattering the usual late-summer lull and roiling vacation plans. \r\n What Bloomberg Strategists say... \r\n \u201cThis is a somewhat idiosyncratic shift that has global consequences as carry trades unwind. There\u2019s no necessary reason for it to remain a concern for risk assets outside of Japan once positions get flushed out. That\u2019s why Japanese assets have led the way down, and it\u2019s also why they may lag in a rebound.\u201d \r\n As losses piled up across markets, Matt Maley, chief market strategist at Miller Tabak + Co., rushed back to the place he was renting in London and whipped out his laptop. He was there on vacation with his family but those plans were out now. Like Yardeni, he too remembers the 1987 crash and the jolt it gave him and said he felt a bit of a deja vu Monday morning. \r\n \u201cYou don\u2019t wake up every day like this,\u201d Maley said. \u201cI remember how things got in 1987.\u201d \r\n The forces that unleashed Monday\u2019s turmoil had been steadily building for weeks. \r\n In early July \u2014 just as tech stocks were hitting a peak \u2014 the Japanese yen began appreciating sharply as investors positioned for the Bank of Japan to join other central banks in pulling back its flood of monetary stimulus. That drove traders to unwind so-called carry trades, which involve borrowing relatively cheaply in Japan and investing elsewhere, to preserve profits they made. This in turn exerted selling pressure on markets worldwide as borrowed money was returned. \r\n That was followed by a steady drumbeat of earnings reports that fanned worries that the big tech stocks \u2014 which had driven much of the recent rally \u2014 had run up too far, with companies yet to reap any profit bonanza from the massive investments in artificial intelligence. Amazon.com Inc. and Intel Corp. both plunged after disappointing results. \r\n At the same time, the bond market kept flashing increasing worries and data signaled that parts of the economy were starting to cool. By Wednesday \u2014 when the Fed held rates steady at a more than two-decade high and the BOJ tightened policy \u2014 bonds had already rallied. Then on Friday they gained further after the unemployment rate rose and job growth came in well short of forecasts. \r\n Across Wall Street, economists started predicting that the Fed would need to swoop in with half-point cuts or act between meetings \u2014 the kind of step usually reserved for a crisis. \r\n Shoki Omori arrived at Mizuho Securities Co.\u2019s Otemachi offices at 6 a.m. on Monday ready for big market swings. But even he was surprised at the scale of the selloff. \r\n As the yen skyrocketed 3%, a result of the BOJ\u2019s rate hikes, the Nikkei index tumbled throughout the session. At day\u2019s end, it had fallen the most since 1987. \r\n \u201cThis blew all my expectations,\u201d said Omori, the chief desk strategist in Tokyo. \u201cWe\u2019re heading into some unimaginable trading territory here. Brace for more.\u201d \r\n The losses went on to ripple through other Asian markets and into Europe, where major stock indexes slumped, and then into the Americas. It seeped into credit markets too, with at least two companies \u2014 wireless infrastructure provider SBA Communications and theme park operator SeaWorld Parks & Entertainment \u2014 postponing loan deals worth a combined $3.8 billion. \r\n By late afternoon in the US, stocks recovered from their low, leaving the Nasdaq Composite Index down 3.4%, and the bond market had steadied. But that did little to calm rattled traders who were hesitant to chalk this up as just another false alarm. \r\n \u201cI\u2019m still concerned,\u201d said Maley, the strategist at Miller Tabak. \u201cWe\u2019re still worried about earnings and the economy.\u201d \r\n "

"$6.4 Trillion Stock Wipeout Has Traders Fearing \u2018Great Unwind\u2019 Is Just Starting"

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