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Making Sense Of Volatile And Fickle Markets
INSIGHT WEEKLY: August 11, 2024
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Reading time of just 5 minutes to be well informed of the need-to-know topics of our times.
🌐 Major market indexes and stocks
Major market indexes:
Why was there such volatility in the markets in the last two weeks?
The VIX index, which measures volatility increased hugely before dropping this week.
The backdrop is high large-cap tech stock prices, recessionary risks, high interest rates, and geopolitical risks. So there was already a growing sentiment that stock prices are perhaps too high.
What happened on Friday, August 2:
US labor market data was released and showed an increased risk of recession.
What happened on Monday, August 5:
Growing concern that Japan carry trades are being unwound pushing US stocks down.
This chart shows the day-by-day percentage movements
What are the Japan carry trades?
Since interest rates are so low in Japan, borrowing Japanese yen at these low rates, converting to US dollars, and investing in US stocks, like high-performing tech stocks, looked like a good idea. There was an estimated $4 trillion of carry trades.
And then something went wrong. The currency exchange rate moved against the carry traders.
The Japanese Yen started to appreciate as the Bank of Japan raised interest rates from 0.1% to 0.25% and indicated that there was more to come. This is part of the normalization plan for markets in Japan.
Now the loans in Japanese Yen need to be repaid at higher exchange rates. So the traders started to sell US stocks and the US markets fell.
Why are the markets fickle? The carry trades were known, and there was an expectation of an increase in interest rates in Japan. A sudden realization on one day that there was a problem?
What is the status now? An estimate from JP Morgan is that 75% of carry trades have been unwound. So the risk would appear to be less now. Also, the Bank of Japan has indicated that they will slow down on the rate hikes.
If Japan sticks to very low interest rates, would that not increase the risk of carry trades repeating?
The markets have calmed but it is worth noting that the S&P500, the bellwether of the US stock markets, is down over 4% in the last month.
Where do the markets stand after a volatile two weeks :
Has there been a structural shift in the markets?
Just over a week ago, there was a shift away from large-cap stocks to the medium-sized and smaller stocks that make up the Russell 2000.
The shift or “broadening” seen last week has slowed.
Magnificent 7:
Meta gains on good earnings.
Major Semiconductor stocks:
Intel’s woes continue after shareholders take legal action, saying the company has concealed problems. Last week Intel announced plans to cut 15,000 jobs, after losses in the second quarter due to competition from other chipmakers and higher costs in its foundry business. The stock price is -61% this year.
TSMC, the world’s dominant AI chip foundry, gains as sales increase 45% year over year on AI chip demand.
PHLX Semiconductor index (SOX):
A wider “capitalization-weighted” index composed of the 30 largest semiconductor companies traded on US exchanges.
Longer-term investors who buy regularly and hold for longer. are unfazed by short-term market gyrations. The blips and dips are to be expected.
A quote from Benjamin Graham:
“In the short run, the market is a voting machine, but in the long run it is a weighing machine.
🇬🇧 UK
Tax rises are being planned by the new government. Among the options being considered are Capital Gains Tax, windfall taxes on energy companies, removal of tax exemptions on private schools, and taxes on “non-doms” (overseas citizens resident in the UK).
Interest rates will next be considered at the Bank of England meeting on September 19. It is unlikely that there will be another cut following the cut in August.
Job market is cooling according to research carried out by the Recruitment and Employment Confederation (REC) and KPMG. Such data will add to the case for a cut but additional data will be needed to support such a decision. The vote in August was 5-4 in favor of a cut.
Mortgage rates for a 5-year fix with a 25% deposit are around 4.7%. A 2-year fix is around 5%.
UK housing market improved in July. The Royal Institution of Chartered Surveyors said its measure of expected sales over the next three months rose to the strongest level since January 2020. The Halifax stated that house prices rose by 0.8% in July after three months of flatlining prices, and by 2.3% year over year.
FTSE100 is -0.1% this week and +5.6% in the year to date.
🇺🇸 US
Consumer demand weakened according to reports from some companies. Travel demand also weakened according to Delta, United, Airbnb, Marriot, Hilton and Disney.
Jobless claims numbers released on Thursday showed a drop to 233,000 from 250,000.
Rate cut expectations and demands grew over the last two weeks. Some were demanding an immediate emergency rate cut, others were asking for a 0.5% cut in September instead of the usual 0.25%. The Federal Reserve would not comment or respond to the demand for an immediate emergency cut, indicating no change in the planning for managing interest rates.
The next Fed meeting is scheduled for September 17-18.
S&P500 is unchanged this week and +12% year to date.
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🇯🇵 Japan
Interest rates were hiked last week but as mentioned above, the Bank of Japan indicated that it will not hike rates again when markets are unstable. Normalization is on hold!
The rate was increased to 0.25% from 0.1%. Japan had negative interest rates till March this year.
Yen ended the week at 146.6. With interest rates paused, and with carry trades being unwound, the outlook is unclear though fundamentally the currency is weak.
Stock markets reflected the reaction to global markets and the impact of Japan-related carry trades in the US.
The longer-term chart shows the journey of Japan over the last 60 years, becoming an economic powerhouse, the growth, and the bursting of the bubble in the 1980s. The market peaked in 1989 and it took 35 years to get back to similar levels earlier this year before declining. What next for Japan?
Nikkei 225 Index is -2.5% in the week and +4.7% in the year.
See previous spotlight on Japan.
🌐 Artificial Intelligence
This cover has been designed using assets from Freepik.com
UK Government canceled AI funding of £1.3bn last week. In a changed emphasis, the government is backing smaller projects, announcing a £32m investment in around 100 projects across the country.
The earlier cancellation was for £800m for a supercomputer, and £500m for compute power, though £300m of that amount had already been distributed.
Elon Musk is again suing OpenAI (which produced ChatGPT) and its founders after dropping a previous lawsuit. The allegation is that the founding mission to benefit humanity has been breached.
Tech stocks declined again this week, though chip stocks partly recovered. There is still ongoing doubt on the payoff of the large investment in AI.
Grok v Groq?
Grok is an AI chatbot developed by Elon Musk’s xAI.
Groq is a chip maker developing AI chips designed to run large language models (LLMs). Groq has just landed $640m in new funding from Blackrock and others. The total raised so far is around $1bn. Could this be a challenger to Nvidia?
See previous spotlight on AI chips
🌐 Crypto Corner
Tracking Bitcoin price (up to August 9):
Bitcoin reflected the volatility and moved in line with major stock markets over the last two weeks.
Tracking Eth price (up to August 9):
Ether also followed global stock markets in the volatity of the last two weeks. Following the ETF launch, outflows are continuing but slowing.
See the previous spotlight on Bitcoin halving
🏅5️⃣ Billionaire Leaderboard
Mostly driven by stock market performance :
Change in week :
Elon Musk (Tesla, SpaceX) $222bn ⬇️ $4bn
Jeff Bezos (Amazon) $186bn ⬇️ $1bn
Mark Zuckerberg (Facebook/Meta) $181bn ⬆️ $10bn up one place after earlier good earnings
Bernard Arnault and family (LVMH) $177bn ⬆️$2bn down one place
Larry Ellison (Oracle) $163bn ⬇️ $1bn
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Stay tuned for more insights and updates each week.