Unwinding of Yen trade and increasing US recession fears

EU mid-market update: Echoes of Black Monday; Volatility skyrockets as circuit breakers trigger in Asia; Unwinding of Yen trade and increasing US recession fears.

Notes/observations

- Bloodbath across Asian trade paralleled 1987’s ‘Black Monday’, 2008 GFC and recent 2020 pandemic as several circuit breakers were triggered after extreme volatility, highlighted by Japanese assets, with Nikkei225 down 15% at lows and USD/JPY down 3%. Selloff momentum translated to EU open but failed to gain traction, holding 2-3% lower. Tech in particular seeing weakness. Nasdaq100 futures were >5% lower at one stage before stabilizing and bouncing. US's 2-year - 10-year bond yields spread nearing uninversion for the first time in nearly 2 years.

- While easy to find bearish developments, analysts are split on if there is a specific single cause of selloff. Main reason for volatility being attributed to unwinding of JPY carry trade, and policy divergence between BOJ and Fed in focus after weak US data last week (“Sahm Rule” recession indicator was triggered in July for the first time since the pandemic) and increased bets on Fed cutting rates. Previous sharp JPY de-leveraging was attributable to the 1997-98 Asian financial crisis and the 2008 GFC.

- Berkshire Hathaway’s Buffet announced record cash stockpile and offloaded half of Apple holdings.

- Geopolitical risks in Middle East as tensions seen at highest levels amid Israel waiting for response from Iran within next 24-48 hours.

- Recalibration of AI/tech stocks remain underway as Nasdaq is in correction territory. Reports that Nvidia's new Blackwell AI chip launch could be delayed by at least 3 months due to 'design flaws'.

- Upcoming earnings before open: Carlyle Group, BioNTech, Global Ship Lease, Tyson.

- Notable earnings after close: Palantir, Clover, Luid, Avis, CSX, Teradata.

- Asia closed lower with Nikkei225 underperforming -12%. EU indices are -1.9% to -2.8%. US futures are -1.6% to -3.9%. Gold -0.7%, DXY -0.6%; Commodity: Brent -1.8%, WTI -1.9%; Crypto: BTC -12.8%, ETH -19.8%.

Asia

- Australia July Final Services PMI: 50.4 v 50.8 prelim (confirmed 6th month of expansion).

- Japan July Final Services PMI: 53.7 v 53.9 prelim (confirmed move back into expansion).

- China July Caixin PMI Services: 51.5e v 51.2 prior (19th month of expansion).

Global conflict/tensions

- US Sec of State Blinken stated that an Iran/Hezbollah attack on Israel could start in the next 24-48 hours but unclear what form retaliation would take.

- Pres Biden said to convene a National Security Council meeting over Middle East tensions on Mon, Aug 5th at (14:15 ET/18:15 GMT); Also to speak with Jordan's King Abdullah on Aug 5th on Middle East developments.

- Israeli officials noted the hostage/ceasefire talks were stalling due to new demands from PM Netanyahu. Demands said to include an international mechanism to prevent weapon transfers from southern Gaza to the North; such demand and others make a deal impossible.

Americas

- Fed’s Barkin (voter) stated that would not prejudge what the FOMC needed to do at the Sept meeting: Would get a lot of data between now and Sept meeting; Feel a little more confident on inflation in the near term.

- WSJ Timiraos wrote that Fed would need to take their almost single minded focus on inflation and also assess if the economy was now slowing more than the Fed expected; if so the Fed would need to set rates closer to the neutral rate which many economists think might be between 3-4%.

- Goldman Sachs analysts raise probability of US recession in next 12 months from 15% to 25% (first increase since 2023's regional banks' stress).

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -2.33% at 486.26, FTSE -2.25% at 7,990.62, DAX -2.09% at 17,273.65, CAC-40 -1.80% at 7,121.04, IBEX-35 -2.36% at 10,420.70, FTSE MIB -2.90% at 31,091.00, SMI 5-2.53% at 11,557.41, S&P 500 Futures -2.40%].

Market focal points/key themes: European indices open lower across the board and trended lower through the early part of the session; move seen as a continuation of the drop that started at the end of last week; Croatia and Iceland closed for holidays; all sectors start the day in the red; among less negative sectors are consumer staples and health care, sectors leading the way lower include technology and financials; Carlyle to sell Congentrix Energy to Quantum Capital; SocGen sells its UK and Swiss private banking units to UBP; L’Oreal takes stake in Galderma; Sidara will not make a bid for Wood Group; earnings expected in the upcoming US session include Sonic Automotive, Palantir, Banca Monte dei Paschi, and Tyson Foods.

Equities

- Consumer discretionary: Adidas [ADS.DE] -2.0% (global selloff), PostNL [PNL.NL] +4.0% (earnings).

- Financials: UBS [UBSG.CH] -4.0%, Deutsche Bank [DBK.DE] -4.5%, Commerzbank [CBK.DE] -2.5% (global selloff amid unwinding Japanese yen carry trade).

- Healthcare: Galderma [GALD.CH] +7.5% (L'Oreal takes stake).

- Industrials: OCI [OCI.NL] +11.0% (divestment), Rheinmetall [RHM.DE] -5.5% (global selloff), John Wood Group [WG.UK] -38.0% (Sidara does not intend to make a firm offer).

- Technology: Nvidia [NVDA.DE - Frankfurt listed] -9.5% (Nvidia's new Blackwell AI chip launch to be delayed by at least 3 months due to 'design flaws'; global selloff and Infineon results/Foxconn sales), Infineon [IFX.DE] -3.5% (Q3 results; outlook).

Speakers

- Poland Central Bank (NBP) Sobon stated that a rate cut is unlikely in H1 2025.

- Ukraine Central Bank (NBU) July Minutes: Vote was unanimous to keep policy steady at 13.00%.

- Japan Fin Min Suzuki staed that was watching equity market decline with strong interest; Important for govt to make decision calmly.

- Taiwan Bourse (TWSE) said not to need any measures for market stabilization at this time; fundamentals remain strong.

- Iran Foreign Ministry Spokesman Kanaani commented that was not looking to escalate tensions in the region; had the right to punish Israel in framework of international law.

Currencies/fixed income

- Session began with risk aversion flows as Far East markets slumped with the Nikkei225 down 12% at the close and off by 26% from its July record high. Sentiment fuels by several factors with markets fearing that the Fed might have made an error last week by leaving interest rates unchanged and now behind the curve due to US recession concerns. Additionally continued Mid-East tensions percolated after weekend comments from US Sec of State Blinken that an Iran/Hezbollah attack on Israel could start in the next 24/48 hours but unclear what form retaliation would take.

- Safe haven flows ebb a bit after Iran Foreign Ministry Spokesman Kanaani stated that it was not looking to escalate tensions in the region and numerous Far East market regulators hinted there was no need for any measures of market stabilization at this time.

- The Yen currency remained the main beneficiary of safe-haven flows compounded by unwinding of carry-trade positions. USD/JPY at 142.40 by mid-session and 20 big figures from its recent highs.

- CHF currency (Franc) was at a record level against the Euro. SNB had no comment on recent CHF currency appreciation.

- EUR/USD at 5-month highs as it reapproached the 1.10 level.

Economic data

- (DK) Denmark Jun Industrial Production M/M: +0.1 v -6.8% prior.

- (RU) Russia July Services PMI: 51.1 v 48.5e (1st expansion in 3 months); Composite PMI: 51.1 v 50.0e.

- (SE) Sweden July PMI Services: 53.8 v 52.0e; PMI Composite: 52.5 v 52.4 prior.

- (HU) Hungary Jun Preliminary Trade Balance: €1.01B v €1.1Be.

- (ES) Spain Jun Industrial Production M/M: 0.3% v 0.0%e; Y/Y: 0.6% v 0.6%e; Industrial Output NSA (unadj) Y/Y: -4.1% v 0.0% prior.

- (ES) Spain Jun Home Sales Y/Y: -6.1% v -21.5% prior.

- (CZ) Czech Jun Retail Sales (ex-auto) Y/Y: 4.4% v 4.1%e.

- (TR) Turkey July CPI M/M: 3.2% v 3.1%e; Y/Y: 61.8% v 62.0%e; CPI Core Y/Y: 60.2% v 60.0%e - 03:00 (TR) Turkey July PPI M/M: 1.9% v 1.4% prior; Y/Y: 41.4% v 50.1% prior.

- (ES) Spain July Services PMI: 53.9 v 55.0e (11th month of expansion); Composite PMI: 53.4 v 54.3e.

- (ZA) South Africa July PMI (whole economy): 49.3 v 49.2 prior.

- (IT) Italy July Services PMI: 51.7 v 52.9e (7th straight expansion); Composite PMI: 50.3 v 50.9e.

- (FR) France July Final Services PMI: 50.1 v 50.7 prelim (confirmed 1st expansion in 3 months); Composite PMI: 49.5 v 49.5 prelim.

- (DE) Germany July Final Services PMI: 52.5 v 52.0 prelim (confirmed 5th month of expansion); Composite PMI: 49.1v 48.7 prelim.

- (EU) Euro Zone July Final Services PMI: 51.9 v 51.9 prelim (confirmed 6th month of expansion); Composite PMI: 50.2 v 50.1 prelim.

- (UK) July New Car Registrations Y/Y: 2.5% v 1.1% prior.

- (CH) Swiss weekly Total Sight Deposits (CHF): 453.9B v 458.2B prior; Domestic Sight Deposits: 445.5B v 449.5B prior.

- (TW) Taiwan July Foreign Reserves: $571.7B v $573.3B prior.

- (EU) Euro Zone Aug Sentix Investor Confidence: -13.9 v -8.0e- (UK) July Final Services PMI: 52.5 v 52.4 prelim (confirmed 9th month of expansion); Composite PMI: 52.7 v 52.7 prelim.

- (UK) July Official Reserves Changes: +$1.1B v -$0.1B prior.

- (EU) Euro Zone Jun PPI M/M: 0.5% v 0.5%e; Y/Y: -3.2% v -3.3%e.

- (NO) Norway July House Price Index M/M: -1.3% v -0.2% prior; Y/Y: 2.4% v 2.2% prior.

Fixed income issuance

- None seen.

Looking ahead

- (UR) Ukraine Central Bank (NBU) July Minutes.

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (DE) Germany to sell €2.0B in 6-month BuBills.

- 05:30 (NL) Netherlands Debt Agency (DSTA) to sell €1.5-3.0B in 3-month and 6-month Bills.

- 05:30 (ZA) South Africa announces details of upcoming I/L bond sale (held on Fridays).

- 06:00 (IL) Israel to sell bonds.

- 06:00 (NO) Norway announcement on upcoming bond issuance (held on Wed).

- 07:25 (BR) Brazil Central Bank Weekly Economists Survey.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:00 (IN) India announces details of upcoming bond sale (held on Fridays).

- 08:00 (ES) Spain Debt Agency (Tesoro) size announcement on upcoming issuance.

- 09:00 (FR) France Debt Agency (AFT) to sell €5.7-7.3B in 3-month, 6-month and 12-month bills (# tranches).

- 09:00 (BR) Brazil July Services PMI: No est v 54.8 prior; Composite PMI: No est v 54.1 prior.

- 09:45 (US) July Final S&P Services PMI: 56.0e v 56.0 prelim; Composite PMI: No est v 55.0 prelim.

- 10:00 (US) July ISM Services Index: 51.3e v 48.8 prior; Prices Paid: No est v 56.3 prior.

- 11:00 (CO) Colombia Jun Exports: No est v $4.4B prior.

- 11:30 (US) Treasury to sell 13-Week and 26-Week Bills.

- 16:00 (US) Weekly Crop Progress Report.

- 18:00 (CO) Colombia Central Bank July Minutes.

- 19:01 (UK) July BRC LFL Sales Y/Y: No est v -0.5% prior.

- 19:30 (JP) Japan Jun Labor Cash Earnings Y/Y: 2.4%e v 2.0% prior (revised from 1.9%); Real Cash Earnings Y/Y: -0.9%e v -1.3% prior (revised from -1.4%); Cash Earnings (Same Sample Base) Y/Y: 3.2%e v 2.6% prior (revised from 2.3%); Scheduled Full-Time Pay (Same Sample Base) Y/Y: No est v 2.7% prior.

- 19:30 (JP) Japan Jun Household Spending Y/Y: -0.8%e v -1.8% prior.

- 19:30 (AU) Australia ANZ Roy Morgan Weekly Consumer Confidence Index: No est v 83.1 prior.

- 20:01 (IE) Ireland July PMI Services: No est v 54.2 prior; PMI Composite: No est v 50.1 prior.

- 21:00 (PH) Philippines July CPI M/M: 0.3%e v 0.0% prior; Y/Y: 4.0%e v 3.7% prior.

- 21:00 (PH) Philippines Jun Trade Balance: -$4.3Be v -$4.6B prior; Exports Y/Y: -4.2%e v -3.1% prior; Imports Y/Y: -1.5%e v 0.0% prior.

- 21:30 (AU) Australia July ANZ-Indeed Job Advertisements M/M: No est v -2.2% prior.

- 23:00 (TH) Thailand Central Bank to sell THB55B in 3-month Bills.

- 23:35 (JP) Japan MOF to sell 10-Year JGB Bonds.