Kamala Karnage Causes Market Chaos
The Kamala Karry Trade Krash, which took place on August 5, had a sequel one month later. This time, the market experienced a significant drop, with high beta and momentum stocks suffering the most. Unlike the initial crash, stocks started the day strong before collapsing.
The August Payrolls Trigger
The chaos began with the August payrolls. The number, 142K, fell short of the 165K estimate but was a marked improvement on the previous month's 89K. Despite the composition of the number consisting entirely of part-time, illegal workers, the unemployment rate dropped as the number of employed workers saw its biggest increase since March.
The market reaction to the jobs number was unexpected. The strong jobs number should have eliminated the possibility of a 50bps rate cut, but instead, the odds of such a cut first spiked, then reversed, then spiked again. This was largely due to comments from Fed governor Waller, who suggested he would support front-loading rate cuts if necessary.
The Fed's speech was interpreted as more hawkish than it appeared, leading to a rollercoaster of rate expectation reversals. Odds of two cuts jumped from 40% to 60%, then reversed back to 40%, surged to 65%, and finally plunged to 25%, all within a few minutes.
Record Trading in Fed Funds Futures
This frenzied activity led to a record surge in trading in fed funds futures. Volumes in the second generic fed funds future reached 900,000 as of 1pm ET, the highest for any contract since their inception in 1988. The October contract surpassed the previous record from March 2023, following the collapse of Silicon Valley Bank.
Unprecedented Swings Spark Liquidation
These unprecedented swings in the market's most important pricing indicator likely sparked a widespread liquidation across all assets. Stocks, oil, bitcoin, USDJPY, and even gold were all hit. The only asset class that showed some semblance of rationality was bonds, where yields first dumped, then spiked, then dumped again, closing near session highs.
The Week's Rout in Context
This week's rout can be argued to be worse than the August 5 debacle. While the initial crash was a single day of acute pain, by the end of that week, stocks had largely rebounded. This time, however, the pain is just beginning, with widespread liquidations and attempts at intraday reversals achieving nothing.
High beta momentum stock NVDA resumed its plunge, barely remaining above $100, and now down more than 30% from its all-time high in June. The entire Mag 7 sector is now back to levels last seen just after the August 5 crash, possibly due to suggestions that the AI bubble has burst.
Market Behavior in Presidential Election Years
While it's easy to speculate about what happened based on prices, it's just as likely that the week's price action is exactly what was expected. In presidential election years, stocks tend to peak just before Labor Day, then drop until the election, before rising again.
Bottom Line
The recent market chaos serves as a reminder of the volatility and unpredictability of the financial markets. It's crucial for investors to stay informed and be prepared for sudden shifts in the market. What are your thoughts on these recent market events? Do you think the market will recover soon, or are we in for more turbulence? Share this article with your friends and sign up for the Daily Briefing, delivered every day at 6pm, to stay updated on the latest market news.
Kamala Karnage Causes Market Chaos
The Kamala Karry Trade Krash, which took place on August 5, had a sequel one month later. This time, the market experienced a significant drop, with high beta and momentum stocks suffering the most. Unlike the initial crash, stocks started the day strong before collapsing.
The August Payrolls Trigger
The chaos began with the August payrolls. The number, 142K, fell short of the 165K estimate but was a marked improvement on the previous month's 89K. Despite the composition of the number consisting entirely of part-time, illegal workers, the unemployment rate dropped as the number of employed workers saw its biggest increase since March.
The market reaction to the jobs number was unexpected. The strong jobs number should have eliminated the possibility of a 50bps rate cut, but instead, the odds of such a cut first spiked, then reversed, then spiked again. This was largely due to comments from Fed governor Waller, who suggested he would support front-loading rate cuts if necessary.
The Fed's speech was interpreted as more hawkish than it appeared, leading to a rollercoaster of rate expectation reversals. Odds of two cuts jumped from 40% to 60%, then reversed back to 40%, surged to 65%, and finally plunged to 25%, all within a few minutes.
Record Trading in Fed Funds Futures
This frenzied activity led to a record surge in trading in fed funds futures. Volumes in the second generic fed funds future reached 900,000 as of 1pm ET, the highest for any contract since their inception in 1988. The October contract surpassed the previous record from March 2023, following the collapse of Silicon Valley Bank.
Unprecedented Swings Spark Liquidation
These unprecedented swings in the market's most important pricing indicator likely sparked a widespread liquidation across all assets. Stocks, oil, bitcoin, USDJPY, and even gold were all hit. The only asset class that showed some semblance of rationality was bonds, where yields first dumped, then spiked, then dumped again, closing near session highs.
The Week's Rout in Context
This week's rout can be argued to be worse than the August 5 debacle. While the initial crash was a single day of acute pain, by the end of that week, stocks had largely rebounded. This time, however, the pain is just beginning, with widespread liquidations and attempts at intraday reversals achieving nothing.
High beta momentum stock NVDA resumed its plunge, barely remaining above $100, and now down more than 30% from its all-time high in June. The entire Mag 7 sector is now back to levels last seen just after the August 5 crash, possibly due to suggestions that the AI bubble has burst.
Market Behavior in Presidential Election Years
While it's easy to speculate about what happened based on prices, it's just as likely that the week's price action is exactly what was expected. In presidential election years, stocks tend to peak just before Labor Day, then drop until the election, before rising again.
Bottom Line
The recent market chaos serves as a reminder of the volatility and unpredictability of the financial markets. It's crucial for investors to stay informed and be prepared for sudden shifts in the market. What are your thoughts on these recent market events? Do you think the market will recover soon, or are we in for more turbulence? Share this article with your friends and sign up for the Daily Briefing, delivered every day at 6pm, to stay updated on the latest market news.
