Nikkei 225 index drops by over 4% on growth fears

Look to Japan.

A fresh growth scare that smells awfully like the one we had a month ago sent stocks tumbling and oil and copper deeper into negative territory. Even gold is down (chart below) with yields (though TIPS yields had been pushing up over the last week) – it's kind of sell everything clear out after a frothy run, but clearly the oil market is telling us something about growth fears.  

September is already shaping up to be a volatile month – the question is whether the Fed blinks and thinks it needs to go for 50bps...that could signal panic and could trigger further losses – indeed a big cut by the Fed could trigger further unwinding in yen carry trades and other positions based on low volatility (see below). Indeed, look to Japan this morning – the Nikkei 225 is down more than 4%... this is looks very familiar.  

US Manufacturing PMI comes in soft, sends warning signals on economic conditions

It is also about positioning and not getting wrong-sided by a duff payrolls number. JOLTS today is important, seen down to 8.090 million in July.  It all looks a bit nervy, a bit seasonal and a bit short-term positioning, rather than reflective of a fundamental concern.

First China’s manufacturing PMI hit a six-month low. Now the latest US ISM manufacturing PMI came in pretty soft, failing to allay concerns that perhaps a “soft landing” is not a given. Chatter about a 50-basis-point (bps) cut is only adding to the sense that the Fed may have left it too late.  

The PMI came in at 47.2 vs 46.8 prior and 47.5 expected. The employment sub index ticked up from a three-year low to 46.0 from 43.4 a month ago. Prices index rose to 54.0 vs 52.0 expected. Construction spending -0.3%, unchanged from last month and below the estimated +0.1%. 

Nvidia stock tumbles by 10%, close to $400 drop in market cap biggest in US history

US stocks tumbled, led by a 10% decline for darling Nvidia. The $279bn drop in its market capitalization was the biggest in US history. News of a DoJ antitrust investigation didn’t help lift the mood after-hours, pushing the stock down a further 3%. The S&P 500 fell more than 2%, the Dow Jones fell 1.5% and the Nasdaq declined more than 3% - all three having their worst days since the August 5th selloff. Futures indicate a weaker open later.

Europe closed lower as Wall Street stumbled – defensive positioning ahead of the US ISM translated into further selling on the release. (FTSE –0.78% to 8,298; DAX –0.92% to 18,756; CAC –0.93% to 7,575)  

The rot has set in further today with the FTSE 100 down around 0.8% in the first hour of trade to 8,233, with the DAX and CAC down by around 0.7%.  

Treasury yields turned south as bonds caught some haven bid, the 10-year dipping around 10bps to 3.81% after rising for five straight days. September is usually a big month for supply so we are anticipating further volatility. 

Oil, copper prices point to wider trouble

Loretta Mester, formerly of the Cleveland Fed, said there will be a discussion at the next Fed meeting on whether they want to start with a 25 or 50 basis point cut... I think this is sending the wrong message about the economy. As noted yesterday, after a strong momentum bounce in August there is a sense that traders are just taking the market down a peg or two into the uncertain September-Election period… but oil and copper are speaking about wider trouble. We are likely seeing some of that procyclical deleveraging that encouraged the selloff in August.  

Speaking of that, which was led by unwinding yen carry trades, we are seeing plenty of defensive positioning in FX as the yen rallied about 1% against the USD, with USDJPY to 145.0 this morning from 147.2 yesterday.  

The unwinding of the carry trade was a key driver in the August panic and the risk has not gone away. The 4% drop for the Nikkei 225 index today speaks loud.

BIS notes that the drivers and catalysts behind the volatility spike in early August and large market moves have not changed significantly.  

• Only a portion of various trades that relied on low volatility and cheap yen funding appear to have been unwound;
• Some other trades may yet need to be unwound more slowly;
• There are already indications that some leveraged positions are quickly being rebuilt. (the risk rally that so sharply erased the losses would attest to this). 

“More broadly, a number of factors behind the recent turbulence reflect structural features of our financial system, notably the greater heft of market-based finance,” warns BIS. “Of particular concern are the ones that enable the build-up of large positions in periods of calm and necessitate their quick unwinding when volatility rises. The reliance on leverage for many of these positions implies that investors will have to respond more strongly to adverse shocks to avoid significant losses. If such behaviour takes place in a jittery and illiquid market environment, volatility could be further exacerbated, and a negative feedback loop could be kindled. In addition, sudden (and large) changes in margins from derivatives and securities positions that are not directly linked to trades that rely on low volatility could add further pressure to markets, infrastructures and intermediaries.”

A look at the charts

The FTSE index was down the last couple of sessions but still holding the range it’s held since April.  

Spot Brent oil is testing the Dec ‘23 low. Brent broke down at $75 support ahead of the ISM data then cracked at $74 and is now at the $72.52 swing low from last December as of send time.  Could have further to run lower if the technical picture is right.

The copper price is at its lowest in nearly three weeks.

EURUSD stabilising around the 23.6% retracement.

Gold, which had been under pressure from five straight days of higher Treasury yields and a firmer dollar, seems to be following everything else down – this points to deleveraging.

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