For American investors, last week was undoubtedly a roller-coaster ride of violent index fluctuations, marked by plunges, rebounds, drops, and surges. Experts in the industry would like to clarify whether the "summer storm" that has been raging in financial markets has come to an end after a weekend's rest.
Last week, the tense and exciting turmoil brought some challenges for American stock investors. Standard & Poor's 500 Index surged and plunged in a series of wild fluctuations, sending the CBOE Volatility Index (VIX), which measures the implied price volatility of the S&P 500 index, to an unprecedented level since the COVID-19 pandemic in 2020.
After experiencing a weekend, experts in the industry undoubtedly want to clarify whether the 'summer storm' that has roiled financial markets has come to an end or not.
Clearly, not only American stock investors but also bond market, foreign exchange market, and even cryptocurrency investors experienced a series of wild fluctuations last week. Here are some statistics on the tense and exciting market fluctuations from Monday to Friday last week:
Monday: S&P 500 Index plunged 3%, and VIX index soared from 23 points to 65 points; the yield curve of 2-year/10-year U.S. Treasury bonds ended inverted since 2022, the Nikkei 225 Index experienced the largest single-day point drop in history, and the Japanese yen skyrocketed to 141.7 against the U.S. dollar, and Bitcoin plummeted 16% to below $50000.
Tuesday: S&P 500 Index rebounded over 1%, and VIX Index hit the largest drop since 2010; Nikkei 225 Index rose over 10%.
Wednesday: S&P 500 Index reversed from a 1.7% intraday gain to close down 0.77%, and the Japanese yen fell to 147.9 yen against the U.S. dollar.
Thursday: The initial claims data boosted market sentiment, and the S&P 500 Index surged 2.3%, the largest increase since November 2022.
Friday: The S&P 500 Index weekly closing was basically flat, Bitcoin broke through $60000 for the first time since the previous Sunday, and the yield on 2-year Treasury bonds miraculously ended the week high.
Many analysts pointed out that one significant feature of this year's most severe market turmoil since 2024 is that it is largely caused by traders' excessive behavior. Previously, speculators who had been profiting from the continuous depreciation of the Japanese yen were hit hard by arbitrage trading in the background of the reversal of U.S.-Japanese monetary policy, and quantitative analysts who had been profiting for the past few months were also punished.
In short, although concerns about U.S. economic recession risk ignited the initial sell-off, the subsequent leverage chain accelerated a series of market reversals. However, this also made the potential economic recession signal sent by the plummeting market ambiguous. From retail short-term traders to Federal Reserve Chairman Powell, it seems that everyone is ready for Fed's rate cut in September. Given a series of asset classes and industries that seem to have not sounded the alarm about the economy, a bullish motto has gradually emerged in the noisy market since the end of last week: buy on dips.
So, as a new week begins, what challenges will market participants face next?
New week's challenges
Currently, more intensive macroeconomic data will still be the core challenge that investors need to face. According to the schedule, the U.S. Labor Department will release July CPI data on Wednesday, while on Thursday, the so-called "terrifying data" of U.S. retail sales will also meet investors.
According to the pricing of put and call options, traders currently expect that the S&P 500 index will move in either direction by 1.2% when the U.S. CPI report is released on Wednesday, according to Citigroup's data. Last Thursday, Citigroup's model successfully predicted a large price movement in the stock market after the initial claims data.
If this pricing holds until the close of trading on Tuesday, it will be comparable to the implied volatility forecast on August 23 and August 29, with the former being the day when Powell spoke at the Jackson Hole central bank annual meeting, and the latter being the day after Nvidia released its financial report.
Rocky Fishman, founder of derivative analysis company Asym 500, said "The options market has not yet issued an all-clear signal for stocks. When volatility is high, it has historically been a good time to buy stocks, but to some extent, this has already happened, so CPI will be an important catalyst."
More importantly, although the S&P 500 index has rebounded from Monday's 3% plunge - then a yen arbitrage trade unwinding sparked a global sell-off - professionals in the options market don't seem entirely convinced.
According to Bloomberg compiled data, the hedge against SPDR S&P 500 ETF Trust (the largest ETF tracking the benchmark index) falling 10% in the next 30 days has reached its highest level since October last year, twice that of the hedge contract price when rising 10%.
"We are at a tipping point, where bad news on the economic front would be considered good news, as it would be the catalyst that forces the Fed to turn," said Thomas Urano, co-chief investment officer and managing director of Sage Advisory, adding, "But if data continues to soften from here, the background will disappoint equity investors and lead to greater market volatility."
Thomas Salopek, JPMorgan's head of cross-asset strategy, also believes that in the current stock market, concerns about economic growth risks are still lingering, leading to large rotations of momentum trades and defensive sectors. Industry-assembled data shows that in the past 10 trading days, the S&P 500 index has an average intraday volatility of 2%, the highest since November 2022.
This also explains why traders currently expect the inflation report on Wednesday to show significant volatility.
It is worth mentioning that, as we have previously introduced, if you really want to trace back the root of the violent fluctuations in the yen and US stocks, one of the most important days may be "July 11", which was the day the US last announced CPI.
Currently, the median forecast of surveyed economists predicts that US July CPI will rise 0.2% on a monthly basis, higher than the previous month's decline of 0.1%, while the year-on-year increase in July CPI is expected to remain at 3.0%. Core CPI excluding energy and food prices is expected to be 3.2% and 0.2% on a year-on-year and month-on-month basis, respectively.
If Wednesday's CPI data meets expectations, it may help ease market volatility, but if the data is significantly above or below expectations, traders may readjust their views on the US economy and inflation prospects, and it could trigger a new round of market turmoil.
"If the Fed ultimately cuts rates significantly due to economic slowdowns, it has historically not been good for stock returns. And the current economic performance is not as bad as people imagine. But I expect more volatility in the stock market in the coming weeks, and further declines are not surprising," said Brooke May, managing partner of Evans May Wealth.
Editor/Somer