A look at the day ahead in U.S. and global markets from Mike Dolan
Whether the prospect of a U.S. recession is real or imagined, the mere return of the discussion has been enough to send world stocks and bond yields reeling just as AI doubts and a Japan-led volatility spike have barreled into holiday-thinned August.
And like many global selloffs before it, there's the risk of a self-feeding spiral amid a frantic search for "safe" bonds as speculation about hurried and dramatic interest rate cuts mounts.
Weekend news that Warren Buffett's Berkshire Hathaway (NYSE:BRKa) appears to have soured on stocks, letting cash soar to nearly $277 billion and selling about half its stake in Apple (NASDAQ:AAPL), suggests the 93-year-old revered investor has grown wary of the broader U.S. economy and stock market valuations.
Shares in both Apple and AI-bellwether Nvidia were down almost 10% ahead of Monday's bell.
And as Japanese stocks were one of Buffett's top plays of the past year, that has alarmed an already nervy Tokyo market.
After a torrid week last week, Monday saw the most withering stock rout in Japan since the 1987 crash, as the benchmark Nikkei dropped more than 12%.
Japan has its own very particular story of course - one of the most favoured stock markets of the past year, but one goosed by a plummeting yen that the authorities have spent several months trying to shore up.
And in a classic case of "be careful what you wish for", months of official intervention to buy yen and last week's second Bank of Japan interest rate rise of the year have finally succeeded - but it bowled over the stock market in spectacular fashion in the process.
And the yen swings have seeded turbulence around the world. As interest rate "carry trades" funded by cheap yen borrowing were a lucrative bet among speculative funds for the past two years, the sudden yen surge - which hit its best levels of a year on Monday - and the related volatility spike have sent a shockwave through this and other "risk" trades.
The anxiety spilled out across world markets again on Monday - with South Korea and Taiwan both down 8% and European benchmarks down more 2%.
And it's going to be a rough open on Wall St.
With the Nasdaq now already in correction territory after last week's swoon, futures are pointing to further losses of about 4% on Monday and S&P500 futures are down 2.5% ahead of the bell.
The VIX "fear index" of U.S. equity volatility soared - topping 40 for the first time since the 2020 pandemic lockdowns. A reflection of a reversal of risky bets, Bitcoin plunged 15% from Friday's levels, the Swiss franc surged to its best level of the year - but gold fell, curiously.
U.S. stocks' eye-watering retreat last week came in the thick of a noisy and somewhat disappointing Big Tech earnings season, with fears about an overspend in artificial intelligence and the lack of an end result yet gnawing at investors.
But the return of U.S. recession worries to a market overwhelmingly priced for a "soft landing" of the economy was the biggest game changer - following a series of weak manufacturing and labor market updates.
If past precedents on the pace at which the U.S. jobless rate is rising are applicable - and many think persistent post-pandemic labor market distortions mean they are not - then a triggering of the so-called "Sahm rule" recession flag on Friday was a moment.
Even though the rule's author, former Federal Reserve economist Claudia Sahm, played down the warning this time around, the calculus of a half-point rise in the three-month average jobless rate above the low of the past year stands as a warning nonetheless.
So much so, interest rate markets have scrambled.
Fed futures markets now see a half-point cut in Fed rates as soon as next month and as much as 125 basis points of cuts by yearend.
JPMorgan (NYSE:JPM) Now expects the Fed to cut rates by 50 bps at both September and November meetings, followed by 25-bps cuts at every meeting thereafter.
With U.S. 3-, 10- and 30-year auctions this week, Treasury yields and the dollar have plummeted. Ten-year U.S. yields fell below 3.7% for the first time in more than a year, and have tumbled about 50bps this month already.
Two-year yields fell as low as 3.69% and the two-to-10-yield curve steepened to within a whisker of positive territory for the first time in over two years - seen by some as a warning sign of recession ahead after two years of inversion.
Riffing over pumped-up Fed easing talk, the dollar index touched its lowest since March.
Critical now will be readings from the U.S. service sector later today, a reality check from Fed speakers and also the release of the Fed's quarterly senior loan officer survey.
Key developments that should provide more direction to U.S. markets later on Monday:
* U.S. July service sector surveys from ISM and S&P Global (NYSE:SPGI). Fed's quarterly senior loan officer survey
* San Francisco Federal Reserve President Mary Daly speaks
* U.S. corporate earnings: Tyson Foods (NYSE:TSN), CSX (NASDAQ:CSX), ONEOK (NYSE:OKE), Diamondback Energy, Realty Income, Simon Property (NYSE:SPG), Williams
* U.S. Treasury sells 3-, 6-month bills
(By Mike Dolan, editing by Mark Heinrich; mike.dolan@thomsonreuters.com)