Markets Price Deep Fed Cuts through the Year – US Market Wrap

A renewed bout of volatility hit financial markets as recent talk about a US economic recession, which is widely regarded as premature, prompted warnings that this year’s sizzling stock rally has gone too far.

From New York to London and Tokyo, stocks were hammered. Just as markets began to celebrate the Federal Reserve’s signals of a first rate cut, they were hit by a perfect storm of weak economic data, disappointing corporate earnings, stretched positioning, and poor seasonal trends. While the S&P 500 recovered some of its losses, it experienced its steepest drop in nearly two years amid high trading volume. The Nasdaq 100, which is dominated by technology, had its worst month-to-date performance since 2008. Wall Street’s “fear gauge” – the VIX – experienced its largest spike in data since 1990.

Treasuries fell after a surge pushed two-year yields, which are sensitive to monetary policy, below the 10-year bond for the first time in two years. Traders believe the economy is on the verge of deteriorating so rapidly that the Fed will need to begin easing policy aggressively. The repricing was so sharp that the swap market previously predicted a 60% chance of the Fed cutting interest rates in the coming week. Those odds subsequently fell.

Treasury 10-year yields fell two basis points, to 3.77%. The dollar fell as the prospect of Fed easing reduced its appeal. A measure of perceived risk in US corporate credit markets skyrocketed, with the turmoil effectively shutting down bond sales on what was expected to be one of the busiest days of the year. Bitcoin fell about 10%.