August saw a dramatic equity market selloff and rapid recovery, breaking what had been a relatively steady rise from October 2023. Selling was triggered by what appeared to be a deterioration in the US economy, particularly the jobs market. The US unemployment rate released in the month, relating to July, jumped to 4.3%, from 4.1% in June, and was significantly ahead of expectations. This, combined with other forward-looking data, led some to suggest that the US economy was headed towards recession. As the only region to maintain strong growth following the initial COVID rebound, this weakness was a particular concern for investors.
In line with the narrative of a weakening economy, bond yields also fell and expectations for rate cuts from the Federal Reserve were increased and brought forward. This rapid change in monetary policy expectations triggered sharp market movements and was especially observed in currency markets. In particular, the focus was on the Japanese Yen and US Dollar pair. The so-called carry trade between these two currencies, where investors borrow cheaply in Yen and buy higher-yielding dollar assets, unwound quickly. The enormous size of this “trade” was exposed as speculators had to rapidly reposition, causing the Yen to appreciate and risk assets to fall. The call on liquidity appeared to exaggerate market movements and led many observers to question if the reaction to the new economic data was overdone.
Indeed, with the release of new economic data towards the middle of August, consensus views changed. More “normal” job numbers and consumer data suggested that while economic growth continued to ease in the US, it was not decelerating rapidly. This gave comfort to those looking to buy the dip, and reallocate to equities. However, similar moves were not seen in bond markets, where yields generally remained suppressed. It is likely that this new market dynamic is likely to persist as these two groups of investors battle between the soft landing narrative, and that of a recession.
Outside of the macro data, the hotly anticipated Nvidia quarterly results were released towards the end of the month. The announcement is now seen as important as any macro data release, with the $3tn stock often moving significantly following the release, as well as impacting broader market sentiment. The company has been growing so strongly that market expectations are extremely high. Although results came in ahead of analysts’ forecasts for both revenue and earnings, the market reaction was negative and indicates that investors are now expecting the exceptional. While the company remains operationally strong, it appears increasingly unlikely that it can now meet these heightened expectations.
