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

Good morning. Dovish signals from the BOJ give fresh legs to the recovery in stocks, while some of Europe’s biggest companies release disapp [View in browser]( [Bloomberg]( Good morning. Dovish signals from the BOJ give fresh legs to the recovery in stocks, while some of Europe’s biggest companies release disappointing earnings. 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](. Recovery signs Global stocks markets are [continuing their recovery from Monday’s wild selloff]( as the chaos that started the week gives way to calmer conditions. The Stoxx Europe 600 index rose 1.4%, while futures on the S&P 500 and Nasdaq 100 gained after the underlying indexes rebounded more than 1% on Tuesday. In another sign of the better tone, Treasuries and other global bonds ticked lower. Japan jolt The rally was given [fresh legs in Japan]( where central bank Deputy Governor Shinichi Uchida sent a strong dovish signal in the wake of [historic financial market volatility]( pledging to refrain from hiking interest rates when the markets are unstable. The yen weakened by more than 2% against the dollar, bond futures spiked higher and stocks rose immediately after his comments, which were the first public remarks by a BOJ board member since the bank raised rates on July 31. Worries remain Still, despite today’s developments, Japan has nonetheless [become a major source of worry]( many global investors. Bank of Japan action last week forced traders to abandon strategies based on macro views that Japan’s currency would stay weak and interest rates wouldn’t rise too fast.  The surge in the yen also derailed one of the most profitable market strategies this year: carry trades which involve borrowing the Japanese currency to invest in other global assets. European earnings In Europe, stock market gains on Tuesday were tempered somewhat by disappointing earnings reports from some of the region’s biggest companies. [Novo Nordisk]( shares plummeted after the Danish drugmaker cut its profit forecast for the year, while [Commerzbank]( sportswear maker [Puma]( and skin-care products maker Beiersdorf AG also slumped after earnings misses. 20-Year Troubles Since the US Treasury re-introduced the [20-year bond]( in monthly auctions four years ago, their sale has tacked on roughly $2 billion a year in interest expenses on top of what the government would have otherwise paid, a simple back-of-the-envelope calculation shows. Bond-market experts aren’t sure what do with the maturity, but the very man who brought the bond back to life in 2020 -- Steven Mnuchin -- says it’s time to kill them off. What we’ve been reading This is what’s caught our eye over the past 24 hours. - [UK house prices jump in July]( BOE cuts brighten outlook. - Citi warns [China’s yuan is at risk]( from the unwind of carry trades. - Private credit fund burned by risky bets[is bleeding cash.]( - Glencore [abandons its plan to exit coal]( as investors say no. - Even Switzerland is discussing [how to tax the super-rich](. And finally, here's what Joe’s interested in this morning US equity futures are up again today, and the VIX has fallen from over 65 at one point on Monday to less than 25 as of the time I'm typing this. Yet obviously investors are still trying to understand what happened, and whether it was some kind of pure one-off technical event or some larger portent of further trouble ahead. Yesterday, [Tracy Alloway]( and I put out a special, short episode of the [podcast featuring Nomura strategist Charlie McElligott]( which ended up being extremely helpful in terms of explaining what went down. To me a big takeaway is that a lot of the talk about the "yen carry trade blowing up" is a bit of a red herring. Yes, it's true that there are traders or institutions that borrow yen at very cheap rates in order to buy assets that yield higher rates and then attempt to pocket the difference. That's a real thing. But to focus on that misses the forest for the trees in the sense that such a strategy only works in a stable, low volatility environment. In other words, the various players putting on such trades understand the risk of a carry trade blowing up (via rising borrowing costs, or a rising yen itself, or a selloff in the risky assets being purchased), but they were betting that the low volatility environment would persist. And indeed, there are all different kinds of flavors of this trade. Yen carry is just one. We did an episode of the podcast [earlier this year]( with Ambrus Group Co-CIO Kris Sidial talking about the buildup of "short volatility" trades. Back in June we did an [episode with Michael Purves of Tallbacken Capital Advisors and Josh Silva of Passaic Partners]( on the "dispersion trade," which on some level takes the bet that stocks will trade different from each other, which is the effect of keeping overall index volatility low. So to reiterate, in lots of corners around the world, there have been [various flavors]( of the "things are calm and will stay that way" bet being made. Now whether that trade was wrong or right or silly or smart is besides this point. The more important question to be asked is: what caused people over the last few trading days to question whether markets would stay calm? As McElligott puts it, it was essentially the emerging soft landing consensus. Or to put it another way, any type of a bet on a hard landing had been a big money loser. In 2022, there were widespread expectations of a recession (and the market reflected these risks) but then the recession never came. In early 2023 we got the SVB blowup, and everyone thought that might be a tipping point, but from a macro-economic standpoint, that came and went like a raindrop in the ocean. At every point in the last few years, the "it's so over" bet has been a loser, and as such eventually people stop making the bet. So what changed? Well suddenly over the course of the last several days fears of the hard landing re-emerged in a real way thanks to the combination of softening labor data and a Fed that came off as insufficiently concerned about that softening labor data. As I've been writing about all week, Powell mentioned during his conference that labor softness could just be "normalization" and he said there's no guarantee of rate cuts at all anytime soon. And so then Friday you get this ugly Jobs Report (which triggered the Sahm Rule, and yes, we know, maybe the report overstated the labor market weakness due to weather or whatever), and suddenly it feels like whoa, maybe the Fed won't stick the soft landing as the markets have become conditioned to expect. [As Bloomberg Opinion's Conor Sen put it]( "The way to tie some things together is to say that the economy isn’t collapsing overnight, but markets had to price the hard landing going from 0% to 20% overnight." And so it's in that moment that the "things are calm and will stay that way" bets get into trouble. So you have the collapsing yen carry trades. And you have the exploding VIX demolishing the short-volatility trades. And you have rising correlations busting dispersion trades. And of course any kind of long stock bets are implicitly short volatility trades, and you get this plunge in the hottest names in the market (like Nvidia and other MAG 7 companies). [The whole episode is worth listening to]( and Charlie really goes deep into volatility market fundamentals. But at root, you've had years now where people betting on a hard landing got burnt (even 2020, with Covid, could be seen as an example of this, but on steroids). This happened over and over again. Vol sellers and dip buyers kept winning. And so when suddenly it looks like that risk re-emerges seemingly overnight, you get a day like Monday. Joe Weisenthal is the co-host of Bloomberg’s Odd Lots podcast. Follow him on X [@TheStalwart]( Like Bloomberg's Five Things? [Subscribe for unlimited access]( to trusted, data-based journalism in 120 countries around the world and gain expert analysis from exclusive daily newsletters, The Bloomberg Open and The Bloomberg Close. [Bloomberg Markets Wrap: The latest on what's moving global markets. 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