A bout of volatility rattled investors last week as renewed talk of recession and a popular carry trade unwind put markets on edge. Following poor employment reports the week prior, Monday started with news that the Bank of Japan was raising interest rates, causing a meaningful selloff as investors deleveraged short Yen positions. A “carry trade” takes place when an investor borrows in a currency with low interest rates, such as the Yen, and reinvests the proceeds in a currency with a higher rate of return, such as the US Dollar. When the rate spread narrows, it usually causes acute periods of volatility as investors rush to rebalance their risk. Turmoil in Tokyo boiled over as the Yen rebounded 13% against the US dollar, effectively forcing margin calls on the carry trade. At one point on Monday, markets were briefly calling for an emergency rate cut from the Federal Reserve given the disorderly market action.
While this event was short-lived, it highlighted broader systemic risks that had been largely been overlooked until now. By the time the dust settled at the end of the week, the S&P 500 Index finished lower by only a few basis points but marked the fourth straight losing week — its longest streak since September 2023. The tech-heavy NASDAQ Index slipped 0.2% while Russell 2000 Small Cap Index fell 1.3%. In fixed income, yields moved higher for the week, pushing the US Aggregate Bond Index lower by 0.8%.
Volatility Spikes After Months of Calm, Posting Historic Intraday Jump Last Week
CBOE Volatility Index
Source: Bloomberg, CBOE.
Despite the Volatility, Markets Ended the Week Largely Unchanged
S&P 500 Daily % Change
Source: Bloomberg, S&P.
The wild ride was highlighted by the Volatility Index—Wall Street’s “fear gauge”—at one point registering the largest single-day spike since 1990. This was a dramatic move when compared to the turmoil markets experienced in the 1999 tech bubble, the 2008 global financial crisis, and the 2020 COVID pandemic. Financial markets nervous chatter about a US recession—widely seen as premature—spurred warnings that the 2024 equity market rally has gone too far. Renewed doubts were boosted by a convergence of weak economic data, underwhelming corporate earnings, stretched valuations, offside positioning, poor seasonal trends, and a general fear the Federal Reserve is behind the economic curve. Now, all eyes turn to this week’s inflation print and the implications for the path of monetary policy.
US Initial Jobless Claims Drop By Most Since September
Initial Jobless Claims
While the wall of worry seemed to grow last week, investors took comfort in new employment data on Thursday showing the labor market is not as bad as feared. Initial claims for US unemployment benefits fell last week by the most in almost a year, helped by fewer applications in states such as Michigan, Missouri and Texas. The S&P 500 Index advanced 2.3%, notching the largest one-day rally since November 2022. As the angst subsided, Treasuries fell across the curve led by shorter-dated maturities.
– Written by Eric Schmitz, CFA