Stocks remained under heavy selling pressure at the start of the week as recession worries continued to dominate global sentiment. A short squeeze in the VIX further weighed on the broader stock market, with the S&P 500 falling by 3.00%.
But the sharpest decline was seen in Japan’s Nikkei, which tumbled more than 12% on Monday, marking its largest one-day decline since 1987.
Following the global sell-off, rates traders are now pricing in a 60% chance of emergency cuts from the Federal Reserve before November.
According to Sevens Report, the market collapse was driven by both fundamental and technical factors.
Fundamentally, economic data has finally forced investors to acknowledge the economy's loss of momentum.
"Namely, that the economy is losing momentum and an economic hard landing, while not yet likely, is possible."
Technically, the collapse was influenced by two stretched markets: the short yen, also known as the “yen carry trade”, and long AI-related tech, exemplified by the Mag 7. For the pullback to stop, both fundamental and technical factors need to be neutralized.
On the fundamental side, U.S. growth is slowing, raising recession concerns. However, the most important U.S. data still shows a solid economy, including the recent ISM Services PMI.
"This market needs some solid economic data and the sooner, the better, because that will push back on premature recession concerns and remind investors that while growth is slowing, it’s not collapsing,” Sevens Report said in the note.
The problem is that there is a mini “dead zone” for data, with no significant numbers expected until next Thursday, which means recession worries might persist for the next week.
Technically, while financial media may attempt to quantify the size of the Mag 7 longs and firms utilizing the yen carry trade, these estimates are often speculative due to firms' ability to "hide" positions across their balance sheets.
Key indicators close to these technical forces, such as the SOXX (iShares Semiconductor ETF) and the yen, are more reliable, Sevens Report explains.
Both iShares Semiconductor ETF (NASDAQ:SOXX) and Invesco CurrencyShares® Japanese Yen Trust (NYSE:FXY) finished off their lows on Monday, at 193.09 and 63.79 respectively. These levels need to be tested and hold before the technical factors driving the selloff can be considered neutralized.