A renewed bout of volatility hit markets across the board as concerns about a slowdown in the world's largest economy spurred warnings that this year's sizzling stock rally has gone too far.
From New York to London and Tokyo, equities got pummeled. Just as markets were starting to celebrate signals from the Federal Reserve about a first rate cut, they were hit by a perfect storm — surprisingly weak economic data, underwhelming corporate earnings, stretched positioning and poor seasonal trends.
While the S&P 500 pared some of its losses, it was on track for the biggest drop in almost two years. Trading volume was 65% above the past month average.
The tech-heavy Nasdaq 100 headed to its worst start to a month since 2008. Wall Street's "fear gauge" — the VIX — at one point registered its biggest spike in data going back to 1990.
Wall Street's "fear gauge" — the VIX — at one point registered its biggest spike in data going back to 1990.
A rally in Treasuries lost steam after two-year yields — which are sensitive to monetary policy — dropped below that of the 10-year bond for the first time in two years.
Bond traders are betting the economy is on the verge of deteriorating so quickly the Fed would need to start easing policy aggressively. The repricing was so sharp that the swap market earlier assigned a 60% chance of an emergency rate reduction by the Fed over the coming week. Those odds subsequently ebbed.
"The economy is not in crisis, at least not yet," said Callie Cox at Ritholtz Wealth Management. "But it's fair to say we're in the danger zone. The Fed is in danger of losing the plot here if they don't better acknowledge cracks in the job market. Nothing is broken yet, but it's breaking and the Fed risks slipping behind the curve."
Treasury 10-year yields were little changed at 3.78%. The dollar fell as the prospect of Fed easing dimmed its appeal. A gauge of perceived risk in the U.S. corporate credit markets saw its biggest-one day spike since March 2023, after Silicon Valley Bank collapsed.
The turmoil effectively shut down U.S. company bond sales on what had been expected to be among the busiest days of the year. Cryptocurrencies reeled from a bout of risk aversion, sending Bitcoin down over 8%.
The wave of selling hit a fever pitch in Japan as traders rushed to unwind popular carry trades, powering a 1.5% jump in the yen and causing the Topix stock index to shed 12% and close the day with the biggest three-day drop in data stretching back to 1959. The rout wiped out $15 billion of SoftBank Group Corp.'s value on Monday.
"It's complicated: return of the 'R' word derailing the Goldilocks trade," said Maxwell Grinacoff at UBS Investment Bank. "Similar to what we witnessed amidst the small-cap rotation a few weeks ago, the degree of moves was clearly exacerbated by stretched positioning. The difference today is there is fundamental backing to elevated levels of risk premia, from both a macro and earnings perspective."
Bill Gross, the one-time bond king, said in a post on X that he isn't "buying the small recovery from morning bottoms" and is not selling either. Markets are "too volatile with bid/ask spreads extremely wide," he said.
Gross added there is "too much leverage" in the global financial system with the strength of the Japanese yen and "overdone treasury yield declines" key to the unwind.
The U.S. stock plunge is vindicating some of Wall Street's most prominent bears, who are doubling down with warnings about risks from an economic slowdown.
JPMorgan Chase & Co.'s Mislav Matejka — whose team is among the last-standing high-profile pessimistic voices this year — said stocks are set to stay under pressure from weaker business activity, a drop in bond yields and a deteriorating earnings outlook. Morgan Stanley's Michael Wilson warned of "unfavorable" risk-reward.
"This doesn't look like a 'recovery' backdrop that was hoped for," Matejka wrote. "We stay cautious on equities, expecting the phase of 'bad is bad' to arrive," he added.
Longtime market and economy watcher Ed Yardeni said that the current global equities selloff bears some similarity to the 1987 crash, when the economy averted a downturn despite investor fears at the time.
