Markets Wrap (1H August)

In and out with the volatility

So far August this year can be characterized as the most exciting month of 2024, and after 3 weeks passed almost nothing changed. The markets were rattled, after Nikkei 225 index lost around 12% in a single day, and S&P 500 receded over 5% in two trading sessions, unseen losses this year. The markets were faced with a one-two punch combination: fear of recession due to prospects of a weaker US labour market dealt the first blow, and the unwinding in Japanese carry trade finished the job.

•    US recession concerns were caused by an increase in unemployment to 4,3%, this fast of an increase in unemployment (even from an all time low base) can be considered a recession indicator. However, other labour market indicators are not supporting this, hiring and unemployment benefits claims are still solid, and a big part of the unemployment rate increase is caused by temporary layoffs and increase in new entrants to the labour market. 

•    The carry trade unwinding has been hastened by 2 main reasons - increasing Japan's interest rates and the prospect of swift US interest rate cuts. Japan has had ultra-low interest rates for around 30 years which incentivized foreign actors to borrow in yen and lend in a higher yielding currency and local investors to search for better investment opportunities. A sharp strengthening of Japanese Yen has caused some carry trades to unwind, leading to a selloff. After an initial sharp reaction, the losses were contained and the local stock market has recovered.

And after all this, equities are again marching to their all-time highs and risk-on sentiment is back. The biggest change that has stayed after all this is an increase in likely FED interest rate cuts. The market is pricing in around 1% of rate cuts this year, an increase of 0,25% compared to before the market turmoil. At the same time USD has weakened, putting EUR/USD to year highs of above 1,11.

Harris fighting toe to toe with Trump

The democratic party is undoubtedly happy that Biden quit the presidential race and Kamala Harris took over the election torch. Harris' has made inroads and is making progress in crucial swing states. Election odds by "RealClearPolitics" are indicating that the current race stands at basically 50/50 by who will win the presidency. So far Trump has not managed to bite Harris as he did with other candidates before. Harris still has the momentum, but it seems that the initial speed waned off.

Gold and "digital gold" are not made equal

Gold was one of the best performing assets this year and has continued to reach new heights amid the turmoil. While during the year a large part of the price increase has been from central banks expending their gold reserves, gold maintains its position as an asset that you can rely on when uncertainty grips in. Just since July gold price has increased almost 8% and during this year soared over 20%. Bitcoin, sometimes called "digital gold" has not maintained its value in the market turmoil. Even as bitcoin gained more mainstream attention, it has not become more stable or a way to store value in uncertain periods. During the turmoil at the start of the month bitcoin fell around 15%, but this volatility is expected for cryptocurrencies.

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