August was the most volatile month in the markets in four years, which is significant, because the pandemic-induced crash happened back then. Stock rotation affected stock markets around the world affected, with Japan having the most dramatic swing. Currencies were also extremely volatile, and are likely to remain in tune with global markets.
September is traditionally a bad month for stock markets, which means that typically safe havens outperform. Last year saw a strong downturn in the markets in September, only to recover and then surpass the prior highs from October onwards. Meaning that we could be in for a continuation of the rollercoaster ride.
The Great Stock Rotation
Prior to the crash in early August, analysts were talking about how a certain, small number of tech stocks were pushing indices higher. The speculation/hope was that this growth would go beyond those stocks, and “broaden out”. With the expectation that the Fed would get around to easing and a hard landing had been avoided, the thought was that investors would have a strong appetite for risk. That included snapping up smaller companies that often offer more reward in exchange for higher risk.
That trend has all but dissipated with August. There still is a rotation in stocks, but it is going somewhere else. Tech stocks crashed in early August, the worst slump in years, and still haven’t recovered. But large, established, bluechip industrial firms (which are crowded into the Dow Jones Industrial Average – DJIA) have been outperforming. Specific sectors such as consumer staples and health care have been seeing a lot of interest from investors. Those are two important “defensive” sectors that investors buy into when they are looking for safe havens.
The End of Risk?
Not surprisingly, gold found new highs in August, but has since retreated as traders recover a bit of confidence in the markets. However, Nvidia’s earnings results last week show that investors are extremely skittish. The company posted earnings that beat expectations, but the price of the stock still went down. Simply because the company hadn’t exceeded the bar by enough to satisfy overenthusiastic investors.
This proclivity to react stronger to negative news and cautiously to positive news could be a theme through September. The Fed is virtually guaranteed to cut rates, meaning that the markets have already likely priced that “boost” in. In fact, the Fed could end up disappointing traders by “only” cutting by 25bps and leaving open the possibility of another cut for the next meeting.
What Does it Mean for My Trading?
Safe haven currencies such as the Franc and the yen might be biased to the upside through the course of the month. The dollar’s mainstay of being a safe haven relies on its status as a reserve currency – but an economic downturn would cause the Fed to cut aggressively and weaken the greenback. That means its traditional role for safe haven plays might be limited in the short term.
Likewise, if markets remain wary of risk, it could lead to increased volatility in emerging market currencies. Particularly with worries of an economic slowdown weighing on commodities. But, we are entering a string of key economic data points that could finally give the markets confidence that August was just a fluke. However, it might take until after September for that to happen.