5 Things You Need to Know to Start Your Day: Americas

Good morning. Markets return to calmer waters after a ferocious selloff, but the prospect of a rebound is fading. Meanwhile, investors are b [View in browser]( [Bloomberg]( Good morning. Markets return to calmer waters after a ferocious selloff, but the prospect of a rebound is fading. Meanwhile, investors are building up protection against future crashes. Here’s what traders are talking about. — [David Goodman]( Want to receive this newsletter in Spanish? [Sign up to get the Five Things: Spanish Edition newsletter](. Tepid turnaround Markets saw a [semblance of calm]( return on Tuesday after Monday’s dramatic selloff in stocks that capped a three-week, $6.4 trillion retreat in equities globally. But the rebound was decidedly more tepid than the rout, and [doesn’t prove the meltdown is over](. Futures on the S&P 500 and Nasdaq are poised to regain only a fraction of yesterday’s loss, while stocks in the UK and Europe gave up earlier gains to head lower. There were [stronger moves in Japan]( where the two key share gauges both jumped more than 9% at the close after tumbling 12% the day before. Great Unwind The big question now is whether Monday’s wild gyrations mark the final bang of a global selloff that started to build last week or [signal the beginning of a protracted slump](. But, as our Big Take puts it today, one thing is clear: the pillars that had underpinned financial-market gains for years — including an unstoppable US economy and AI revolution — have been shaken. On the flipside, as Goldman Sachs pointed out, buying the S&P 500 after a decline of 5% has been typically profitable in the past four decades. Carry concerns Meanwhile, in currency markets JPMorgan Chase & Co are warning the that recent unwinding of carry trades [has more room to run]( as the yen remains one of the most undervalued currencies. The trade involves borrowing at low rates in Japan to fund purchases of higher-yielding assets elsewhere. It has been pummeled this past week as yen volatility jumped. Changing focus At one point on Monday, markets were speculating about an emergency rate cut from the Federal Reserve, although those bets tailed off during the day. That, along with a rush into haven assets, formed part of the drive to buy US bonds that accompanied the selloff. That dynamic is also fading today, with US Treasuries falling as [traders turn their attentionÂ]( a $58 billion auction of debt today. Black Swan hedging Our markets team has put together a list of what [bankers say you should — and shouldn’t — do when markets crash](. One thing traders did yesterday was rush to insure their portfolios against an extreme market crash. In an echo of the chaotic period at the start of the pandemic, a defensive strategy often known as [Black-Swan hedging]( was suddenly in vogue, with the Cambria Tail Risk ETF, an actively managed exchange-traded tail-risk fund, jumping 4.5% for its best day since March 2020. What we’ve been reading This is what’s caught our eye over the past 24 hours. - Here are some unexpected [winners and losers of Monday’s chaos](. - Major tokens [claw back losses]( as Ether ETF investors buy dip. - Sterling’s wild ride spurs UK plc to [snap up currency hedges.]( - [RBA pushes back]( against near-term rate cut. - UK’s Reeves declines to [rule out increase]( capital gains tax. And finally, here’s what Joe’s interested in this morning Good morning. As type, S&P 500 futures are up, but just 0.5%. At one point they were up 1.5%. So not a particularly powerful comeback at this point. On the other hand, Japan’s TOPIX index rebounded nearly 9% after Monday’s drubbing. And the yen rally has taken a breather. So, at least for the moment, things are a little calmer than they were 24 hours ago. Here are a few thoughts on where things stand, in no particular order. 1) I thought it was interesting that during yesterday’s trading sessions we got a bit of a bounce at 10 AM when the ISM Services number came out. The headline was better than expected (51.4 vs. 51,) and, probably more importantly, the employment sub-index was significantly better than expected, rising to 51.1 (expansion territory) vs. expectations of 46.4. Now granted, the employment sub-index of the ISM Services report is a thin reed to hang your hopes on. But it’s good to see evidence leaning against the notion that the labor market is falling apart right now. We’re clearly in a “good news is good news” environment. I think it’s almost always the case that investors are rooting for strong data. There may be some exceptions (such as at times in 2022) but generally when good things are happening in the economy (or at least less bad things are happening) then good things happen in markets. 2) The labor market is clearly softening. So at least in the context of the US, the question is: Is the labor market deterioration past the point of no return, where even rate cuts won’t stop job losses from picking up massively? Or are we still at a stage where the Fed can “get ahead” of the trend? 3) Speaking of the Fed, at one point in the early Monday hours, markets were pricing in an emergency inter-meeting rate cut. And some talking heads even started calling for them. But today Fed pricing looks a little more stable. Right now, the market is pricing in a roughly 80% chance of a 50 bps cut by the September meeting, according to CME Fedwatch. And there’s still a decent chance we see just 25 bps worth of cuts. Regardless of whether the Fed has made a “mistake” or not, a 50 bps cut in September would be a sharp shift from Powell’s rhetoric last Wednesday when he stated that the possibility of zero imminent cuts was still on the table. 4) It’s important to remember that there’s a lot of Monetary Policy that the Fed is capable of conducting at any time via Open Mouth Operations. In a note to clients, SGH Macro Chief US Economist writes: “Typically, the Fed will send out a Troika member as an emissary to sooth markets as a first response. New York Fed President John Williams would be an obvious choice given his institution’s role in financial markets. The emissary’s message would be along the lines of ‘with inflation low, the Fed has considerable room to respond to risks to the employment mandate.’” Again, what’s important is that the Fed doesn’t need to cut rates to change policy, it would just need to get out a message that’s distinct from what Powell was saying last week. 5) Speaking of monetary policy transmission, the last couple of days have seen a real tightening of financial conditions. Economists will sometimes talk about policy being “tight” or “loose,” often based on some notional relationship between where the Fed Funds Rate is and where the theoretical neutral rate happens to be. The Fed itself talks about policy being restrictive right now. But GDP growth in the US has been growing just fine. Now with the market volatility, we’ve seen actual market borrowing rates shoot up significantly. Here's one measure of High Yield spreads, which was below 3% as recently as late July. Now they’re at their highest levels since last December. Rates may be lower, but the cost of money (at least for some entities) has just shot up. This should exert downward pressure on economic activity, creating greater urgency for the Fed to get a move on. 6) Regardless of what’s going on in the US macro environment or the extent to which there’s more pain coming from the yen carry trade unwind, markets have been exceptionally calm until very recently. Big stock market indexes, led by big tech stocks, had been having an extraordinary year. Things like the VIX had been very low. Implied correlations among stocks had been exceptionally low. It’s hackneyed to say things like “we were due” or whatever, but that kind of market serenity wasn’t going to last forever. It just felt like it. Joe Weisenthal is the co-host of Bloomberg’s Odd Lots podcast. 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