The massive selloff in equities that began last week continued on Monday, affecting not only the US market but also those in Japan, South Korea, Turkey, and basically the rest of the world.
In addition, spreads of US junk bonds over risk-free Treasury yields on Friday recorded the most significant daily point increase since March 2023, with investors rushing into the safety of US government debt.
Numerous reasons behind this shift in investor sentiment exist, among them the murky outlook for the future of the US economy — to be more precise, the fear of a possible recession.
This may seem confusing, given that recent US GDP data for the second quarter came in better than expected, and consumer spending also held up well even though interest rates remain high.
However, the overall picture is not so rosy if we examine it closely. Business surveys are disappointing, and the ISM manufacturing index remains weak due to worrying employment figures.
Specifically, the unemployment rate rose from 4.1% to 4.3%, the highest since October 2021. In addition, employment growth was 114,000 jobs, below the 175,000 expected.
Another factor that hit risk assets was the BoJ's more hawkish than expected tone (it raised interest rates to 0.25%), which triggered a rapid yen strengthening and affected carry trades.
Previously, investors had used borrowed yen to buy other assets, mainly shares of US technology companies. Without this instrument, markets appear to have lost the necessary support, pushing the Nasdaq and the S&P 500 lower.
Will the turmoil continue?
As soon as the US market opened, risk assets, in particular the BTCUSD pair, started to recover slowly. One of the reasons could be the expectation that the Federal Reserve will cut interest rates at an emergency meeting later this week.
The big question now is whether the Fed will actually make this move, and what might happen if it does, especially if inflation rises again and undermines previous efforts.
However, even if the miracle happens and Powell & Co lower interest rates in the coming days, there are other risks to consider, such as the escalation of geopolitical tensions in the Middle East, which could lead to a major conflict.
Overall, the outlook is not very optimistic at the moment. Therefore, it is advisable to exercise caution in the market and avoid leveraged trades, which could lead to significant losses.