Sharp decline, rebound, further decline, and then sharp rise - for US stock investors, their gaze and mood undoubtedly followed the dramatic fluctuations of the stock index and experienced one roller coaster journey after another last week. This tense and exciting volatile market has brought the Cboe Volatility Index (VIX), which measures the implied price volatility of the S&P 500 index, to a level not seen since the peak of the pandemic in 2020.
And now, after a weekend, the most important question that industry insiders want to clarify is undoubtedly: Has the "summer storm" that has swept through the financial market come to an end?
In fact, it is evident that not only US stock investors, but also stock markets, bond markets, foreign exchange markets, and even cryptocurrencies, experienced significant fluctuations last week due to a series of stimulating market conditions. Industry insiders have compiled a series of tense and stimulating market trends from last Monday to last Friday's May Day:
Monday: The S&P 500 index fell 3%, the VIX index surged from 23 points to 65 points, the 2-year/10-year US Treasury yield curve ended its inversion and turned positive for the first time since 2022, the Japanese stock market experienced the largest single day point decline in history, the Japanese yen surged to 141.7 against the US dollar, and Bitcoin fell 16% to below $50000;
On Tuesday, the S&P 500 index rebounded by over 1%, the VIX index experienced its largest decline since 2010, and the Nikkei 225 index surged by over 10%;
Wednesday: The S&P 500 index reversed its 1.7% intraday gains and closed down 0.77%, with the yen falling to 147.9 yen against the US dollar;
Thursday: Initial data boosted market sentiment, with the S&P 500 index surging 2.3%, the largest increase since November 2022;
Friday: The S&P 500 index closed relatively flat on the weekly chart, with Bitcoin breaking through $60000 for the first time since the previous Sunday. The two-year US Treasury yield miraculously closed higher on the weekly chart.
Many analysts say that a significant feature of the most severe market turbulence so far in 2024 is that it is to some extent caused by the excessive behavior of traders. Previously, speculators who took advantage of the continuous depreciation of the Japanese yen encountered a major arbitrage trading frenzy against the backdrop of the reversal of US and Japanese monetary policies, and quantitative analysts who had been profiting from it for the past few months were also punished.
In short, although concerns about the risk of a US economic recession initially ignited the trigger for the strongest wave of selling, the leverage chain subsequently accelerated and triggered a series of market reversals. However, this also blurs the potential economic recession signals sent by the plummeting market - from retail short-term investors to Fed Powell, it seems that they are all prepared for the Fed's September interest rate cut. Given a range of asset classes and industries, there seems to be no call for economic concerns yet, and a bullish slogan has gradually emerged in the noisy market since the end of last week: buy on dips.
So, as the new week begins, what challenges will market participants face next?
The test of the new week
At present, the intensive release of more key macroeconomic data will still be the core challenge that investors need to face. According to the schedule, the US Department of Labor will release the July CPI data this Wednesday, and on Thursday, the so-called "terrifying data" of US retail sales will also meet with investors
According to data from Citigroup, based on the cost of in the money put and call options, traders currently believe that the S&P 500 index will move up or down by 1.2% when the US CPI report is released on Wednesday. Last Thursday, Citigroup's model successfully predicted the major market trend of the US stock market after the initial data request.
It is reported that if this price is maintained until Tuesday's close, it will be comparable to the implied volatility forecasts for August 23 and August 29, the former being the day Powell delivered his speech at the Jackson Central Bank annual meeting, and the latter being the day after Nvidia released its financial report.
Rocky Fishman, founder of derivative analysis company Asym 500, said, "The options market has not yet sent a signal that everything is fine for stocks. When volatility is high, it has always been a good time to buy stocks, but to some extent, this has already happened, so CPI will be an important catalyst
More importantly, although the S&P 500 index has rebounded from Monday's 3% plunge - at the time of the global sell-off triggered by the yen arbitrage trade closing, professionals in the options market do not seem to fully buy it.
According to data compiled by Bloomberg, hedging SPDR S& The hedging contract price of the P 500 ETF Trust (the largest ETF tracking the benchmark index) when it falls by 10% in the next 30 days has reached its highest level since October last year, double the hedging contract price when it rises by 10%.
We are at a turning point where bad news on the economic front would have been considered good news because it would have been a catalyst to force the Fed to turn, "said Thomas Urano, Co Chief Investment Officer and Managing Director of Sage Advisory." But if data continues to weaken in the future, this background will disappoint stock investors and lead to greater volatility in the stock market
Thomas Salopek, head of cross asset strategy at JPMorgan Chase, also believes that concerns about economic growth risks still linger in the current stock market, leading to a major rotation in momentum trading and chasing defensive sectors. According to industry compiled data, the S&P 500 index has had an average intraday fluctuation of 2% over the past 10 trading days, the highest since November 2022.
This also explains why traders currently expect significant fluctuations in Wednesday's inflation report.
It is worth mentioning that, as we have previously introduced, if we really want to trace the source of the severe fluctuations in the Japanese yen and US stocks, the most important day may be "July 11th" - and that day was the last time the US released the CPI.
At present, the median forecast of economists surveyed in the industry shows that the US CPI in July is expected to rise by 0.2% month on month, higher than the previous month's decline of 0.1%. The year-on-year increase in CPI in July is expected to remain at 3.0%. Excluding energy and food prices, the core CPI is expected to be 3.2% year-on-year and 0.2% month on month, respectively.
If Wednesday's CPI data meets expectations and may help ease market volatility, but if the data is significantly high or low, traders may readjust their views on the US economy and inflation outlook, and may trigger a new round of market chaos.
Brooke May, Managing Partner of Evans May Wealth, said, "If the Federal Reserve ultimately cuts interest rates significantly due to an economic slowdown, it is not a good thing for stock returns in history. And currently, the economic performance is not as bad as people imagine. However, I expect that there will still be greater volatility in the stock market in the coming weeks, and it is not surprising if there are more declines