Everyone has their own personal preference (i.e., micro guys blame the breach of key technical supports for the all-important Mag 7s which had carried the S&P for much of 2024, macro guys point to the US economic slowdown, central bank watchers are convinced the BOJ's hawkish rate hike is at fault, derivatives traders are convinced it all has to do with negative gamma and the pile up of short vol trades, flow trackers point to the aggressive selling by hedge funds in the weeks leading up to it) but whatever the real reason behind last week's fireworks, it can be broken down into four main pillars:
- “The perception of increasing recession risk in the US
- The unwinding of the yen carry trade as the spread between Japanese and US rates shrinks
- Internal dynamics in a market dominated by momentum trading, risk parity strategies, passive investors and other wicked inventions that suppress volatility before suddenly releasing
- And finally, the unwinding of a very crowded, concentrated, and overpriced Big Tech trade.”
And, as SocGen's Albert Edwards writes in his latest global strategy note (available to pro subs in the usual place), while the immediate trigger might have been the fear of recession (unfounded or not) following the latest dismal jobs report, "the three other factors then ganged up to form a merciless lynch mob."
