How a week that started in chaos turned into a big ol’ nothingburger
I think we can all agree that everyone remained completely calm and was their best selves this week.
Market historians poring over daily charts will (rightly) believe this week was one for the ages. Those who pore over weekly charts will confine this to the dustbin of history.
The week started with widespread panic about the unwind of leveraged trades, as US stocks tumbled on Monday morning, the US dollar plummeted versus the Japanese yen, and the US stock market’s volatility index hit its highest level outside of COVID or the financial crisis.
It ends with most of those “great unwinds” being almost – or completely – re-wound.
The S&P 500 opened down more than 4% on Monday; the tech-heavy Nasdaq 100 opened down more than 5%. And wouldn’t you know it, the tech-heavy gauge ended the week with a small gain while the S&P 500 was virtually unchanged. Amidst the huge intraday and day-to-day volatility, the benchmark US stock gauge has largely carved out a near-term trading range of 5200 to 5340 this week.
We were only halfway through the unwind of the so-called “yen carry trade” that was wreaking havoc on markets this Monday, according to JPMorgan. Since then the US dollar has ripped higher versus the yen to end the week just barely positive. So much for volatility: the cross moved 0.1% this week when all was said and done.
And, perhaps most astoundingly, the VIX Index – Wall Street’s “fear gauge” – spiked to nearly 66 on Monday morning in the pre-market. It ends this Friday lower than it was one week ago.
An environment where volatility can go haywire, then vanish almost as quickly as it appears, is not necessarily a very healthy market.
Just to be clear, the short-vol trade still has not capitulated. That flow is still active and very aggressive, as large footprints continue to show up as of yesterday and today.
— Kris Sidial🇺🇸 (@Ksidiii) August 7, 2024
To our knowledge, only two smaller desks have been carted off. The Vega rotated on the street over…
And implied correlations continue to creep higher despite the fall in volatility. It might not sound like much, but correlations rising by 2.5 percentage points while the VIX falls by 2.5 points is an odd outcome.
In totality, we’re left with another mixed message from a market that’s chock full of them: things are nowhere near as stressed as the daily charts would lead you to believe, but much more fragile than the weekly charts would imply.
