Global markets are experiencing unprecedented turbulence as AI-linked stocks face multi-trillion dollar selloffs amid growing investor concerns about profitability and competition. According to The Economic Times, South Korea's KOSPI jumped 18% on Friday after tumbling 40% over the previous six weeks, serving as the prime example of this extreme volatility. The cost of insuring against default by some AI hyperscalers has risen as debt levels climb, while earnings reports are triggering increasingly dramatic market reactions. Elon Musk's SpaceX reports its first results since its blockbuster June IPO, with its market value having slumped by an eye-watering $1 trillion since then. Tesla and Alphabet, two giants in the Mag Seven circle, were dinged by investors last week after reporting second-quarter results. Tesla missed on earnings and its capex forecast added to pressure on the stock, while Alphabet beat estimates but said it was lifting its capex guidance for the full year, triggering a 7% drop in the stock midweek.
The Federal Reserve's two-day policy meeting kicking off this week leaves investors bracing for potential volatility amid mixed signals about monetary policy direction. As reported by The Economic Times, Fed funds futures as of Friday were indicating a 64% chance of a rate increase at the Fed's next meeting in September. However, the probability that the Fed hikes rates by 25 basis points at its July meeting has ticked up to nearly 36% on Friday, up from 13% a week ago, according to the CME FedWatch tool. Fed Chair Kevin Warsh reiterated that the central bank has "no tolerance" for high inflation" when speaking to Congress earlier this month. Brent crude, the international benchmark, topped $100 a barrel last week for the first time since May as the war reignited and tankers were attacked in the Red Sea, fanning inflation concerns. The baseline expectation is that the Fed will hike rates once or twice by the end of the year, with the argument for a hike now being that "why wait?" according to Neil Dutta, chief economist at Renaissance Macro Research.
The monthly US jobs report, due on August 7, will command Wall Street's attention along with results from companies including drugmaker Eli Lilly and semiconductor designer Advanced Micro Devices. As reported by The Economic Times, economists polled by Reuters expect the July report to show payrolls increased by 91,000 jobs and the unemployment rate held at 4.3%. A stronger-than-expected reading could raise bets that the Fed may need to resume raising rates to contain persistently above-target inflation at its next meeting in September. The ISM Manufacturing report is due on Monday, followed by JOLTS on Tuesday, ADP employment and the ISM Services report on Wednesday, productivity and unit labor costs on Thursday, and, of course, the jobs report on Friday. The Employment Cost Index rose more than expected for the second quarter when it was reported on Friday, increasing 0.9% versus expectations of 0.8%, with historically a relationship between this index and the 10-year Treasury yield. The 10-year Treasury yield finds itself at a very important inflection point as it pushes up against resistance in the 4.7% to 4.8% range, with a break above that area opening the door to the October 2023 high near 5%.
Technology-focused hedge funds suffered severe losses in July, with data from Pivotal Path suggesting such funds lost more than 10% according to JPMorgan Chase & Co. strategists. As reported by Bloomberg, this drawdown excludes Situational Awareness, the hedge fund that was forced to sell the bulk of its public stock portfolio after a sharp rout in semiconductor and technology stocks. The Philadelphia Semiconductor Index shed 21% in July, its worst month since 2008, as investors rotated out of the top AI performers amid concerns about heavy spending. The stark July loss could force hedge funds to apply more stringent risk management frameworks and concentration limits, thus limiting their capacity to hold highly volatile technology stocks. Prime brokers could reduce balance sheet space allocated to such strategies, according to JPMorgan's Nikolaos Panigirtzoglou. "If this assessment proves correct and the capacity of hedge funds to hold tech exposures is structurally reduced, the tech trade would become over the longer-term even more dependent on retail investors and thus more susceptible to the swings emanating from leveraged ETFs, retail option buying and retail margin accounts," Panigirtzoglou wrote.
According to The Economic Times, global markets face significant turbulence this week from multiple sources, including the ongoing Middle East conflict where a drone strike on two U.S.-owned gas tankers in Egypt's Mediterranean port of Damietta has opened a potential new front in the five-month conflict. In another development, Saudi Arabia publicly joined military strikes alongside U.S. forces this week, targeting Iran-aligned groups in eastern Iraq. Europe's heatwave and wildfires add economic pressures to already strained governments, with mounting costs from healthcare spending and reconstruction bills. Despite these challenges, authorities will be attempting to prop up the rupee, one of Asia's worst-performing currencies this year, with the central bank having attracted more than $20 billion in the first month of its capital inflow measures. Single-stock volatility fell sharply this week and should continue to decline as earnings season progresses, with implied volatility typically rising ahead of earnings reports and falling afterward. The VIX is likely to move higher heading into those releases, which could keep pressure on risk assets as implied correlations begin rising this week.
