POSSIBLE DOWNTURNS
Bond traders are currently predicting a potential economic downturn in the U.S., leading to speculation that the Federal Reserve may need to implement aggressive interest rate cuts to prevent a recession. The market’s focus has shifted from concerns about inflation to fears of stagnant growth, prompting expectations of an emergency rate cut within a week. This anticipation has spurred a notable rally in the bond market, pushing yields to levels reminiscent of the global financial crisis. Recent data indicating a weakening job market and a cooling economy have intensified concerns about the central banks’ responsiveness, leading to a significant selloff in U.S. stocks. This sentiment was further accentuated by Berkshire Hathaway’s sizable reduction in its Apple stake. Furthermore, traders also believe that other central banks, like the European Central Bank, will follow suit by cutting rates.
AGGRESSIVE CUTS
Economists from major banks like Citigroup Inc., JPMorgan Chase & Co., and Goldman Sachs Group Inc. are predicting more aggressive interest rate cuts by the Federal Reserve to prevent a potential economic downturn. Analysts at Goldman Sachs raised the chance of a U.S. recession in the next year from 15% to 25%, though they believe that the economy remains stable overall with no major financial risks. The recent rally in Treasury bonds has driven the 10-year yield down to 3.7%, the lowest since December. This rally was fueled by a drop in the stock market following weak earnings reports from companies like Intel Corp., which announced significant job cuts.
GLOBAL MARKETS IN TURMOIL
Following the announcement that there is potential for a slowdown in the U.S. economy, there has been a ripple effect across global markets. For instance, Japanese stocks have experienced their largest daily decline, with the Nikkei 225 index in Tokyo dropping by a historic 4,451 points and closing at more than 12% lower. The speculation of potential U.S. Federal Reserve interest rate cuts in response to the economic uncertainties has pushed the Bank of Japan to raise its rates, leading to a stronger yen and making Japanese exports less competitive. This dramatic crash has raised worries reminiscent of the 1987 “Black Monday”, and triggered trading halts in South Korea, with the impact extending to other Asian and European markets. Overall, as reflected by CNN’s Fear and Greed Index, global market sentiment has shifted towards a “fear” reading.
CRYPTOS TUMBLED
Cryptocurrencies, particularly Bitcoin and Ether, have undergone a sharp decline in value as global markets experienced a period of risk aversion. Bitcoin dropped by over 16%, reaching a trading value just above $51,000, while Ether saw its steepest fall since 2021, plunging close to the $2,250 mark. This simultaneous downturn in digital assets was driven by concerns over the economic outlook, doubts regarding investments in artificial intelligence, and escalating geopolitical tensions in the Middle East. Additionally, factors such as the unwinding yen carry trade and higher interest rates in Japan contributed to the overall decline. Nevertheless, as bond traders continue speculating on potential U.S. interest rate cuts starting in September to bolster economic expansion, the crypto market could be impacted positively. Moreover, despite the significant losses, there is optimism among some investors due to oversold technical indicators, indicating a possible rebound in the near future.
KEY EVENTS HAPPENING THIS WEEK
Monday: S&P final U.S. services PMI and ISM services reports for July.
Tuesday: U.S. trade deficit report for June, and earnings reports from Uber Technologies, Caterpillar (before the market opens).
Wednesday: Consumer credit report for June, and earnings report from Walt Disney (before the market opens).
Thursday: Wholesale inventories report for June, initial jobless claims for week ending on August 3, earnings report from Eli Lilly (before the market opens), and speech from Richmond Fed President Tom Barkin.
