Phew. Monday was one of the wildest days in markets I’ve seen.

It looks like the “everything sale” may take a breather with stocks ticking back higher in overnight trading.

Still, look for volatility to continue in the coming days.

Today’s editions unpacks just how bad this sell-off really was, and what could come next.

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So, how bad is it?

Global markets have entered a perfect storm for a sell off. 

In case you missed it, here’s what happened Monday: 

• The S&P 500 saw its biggest single-day drop since September 2022

• The Dow shed more than 1,000 points

• The Nasdaq 100 erased almost $1 billion in market value

• The VIX, Wall Street’s Fear Gauge, hit levels that have only been seen in the 2008 Financial Crisis and the 2020 pandemic

And that was only in the US.

Overseas, the Nikkei 225, Japan’s benchmark stock index, saw its worst day since 1987 as it entered a bear market with a 12% decline — just three weeks after it hit a record high. 

Losses piled up across Asia, Europe, and Australia too.

Fortunately, stocks around the world saw a healthy bounce into the green overnight.

That said, one question is still worth asking: What’s going on here? 

Because the July jobs report was weaker than expected, investors are panic-selling their assets over sudden concerns of a recession and evaporating hopes for a soft landing.

Just days ago, markets expected the Fed to cut interest rates in September. Now some analysts have called for an emergency rate cut in the coming weeks. 

The perception of a Fed policy error combined with the bleak jobs data has coincided with a rate hike from the Bank of Japan.

Last week, Japanese policymakers raised its benchmark rate from zero to 0.25 percent, which triggered a global reversal in the so-called carry trade for the Japanese Yen.

The trade works like this: People borrow currencies from a country where interest rates are low, like Japan, and use it to invest in currencies where rates are high, like the US.

But that play hinges on Japan’s zero-rate policies.

…which is effectively over now. More than $14 billion of that trade now have to be unwound, according to CFTC data cited by the Wall Street Journal.

To be sure, plenty of stocks are cratering that have nothing to do with Japan.

Tom Bruni, head of market research at StockTwits, says the global sell-off is less about recession fears and more of a signal that institutional trades are overcrowded. 

“If the concern was a US recession, credit spreads would be widening rapidly and stocks levered to the US housing market like Rocket Companies and Better Mortgage would not be moving higher today,” Bruni told me. 

It’s worth saying that all of the above can hold true without adopting a negative outlook. Larry Tentarelli, founder of Blue Chip Daily Trend Report, told me he is cautious in the near-term but ultimately expects higher asset prices by the end of the year.

Similarly, Ryan Detrick, chief market strategist at Carson Group, pointed out that chaos is normal, but history should provide some comfort.

“Amidst the first potential 10% correction of 2024, it’s worth remembering that 10% corrections happen most years and are more normal than you might think,” Detrick said. 

“In the near term, markets could see an oversold rally, but the outlook for the next two to eight weeks is not as clear yet,” Tentarelli said, adding that he indeed remains bullish overall.

“If the Fed intervenes with an early rate cut, as some have speculated, that could be a factor. An emergency rate cut is not our base case view however.”

Do you expect the S&P 500 to finish the year higher or lower than where it is today? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

Elsewhere:

📉Nvidia stock finished 6.3% lower Monday. That was one of many tech names that finished lower, including Tesla, Alphabet, Amazon, and Microsoft. Unique to Nvidia, however, was news that production snags could delay its next release of key AI chips. (FT)

📈 No sight of calm markets for now. For months, traders have cashed in on bets tied to tranquil markets, but that chapter looks closed. The VIX, a volatility indicator dubbed Wall Street’s fear gauge, saw its biggest one-day spike going back to 1990 on Monday. The extreme heights it touched have only been seen in the pandemic and Great Financial Crisis. (Bloomberg)

🪙 Bitcoin and ether are also falling. The two biggest cryptocurrencies just saw their steepest decline since the collapse of FTX in 2022. Over the last five days, bitcoin and ether have fallen 15% and 25%, respectively. (WSJ)

Rapid-fire:

• An emergency rate cut from the Fed could happen as soon as next week (Business Insider)

• A Federal judge ruled Monday that Google has illegally held a monopoly over search and texting (CNBC)

• Intel stock tumbled another 6% Monday, now down about 60% since the start of the year (Yahoo Finance)

• Chicago Fed President Goolsbee said that if the economy deteriorates, the Fed will “fix it” (CNBC)

• Longtime market-watcher and strategist Ed Yardeni sees similarities today to the 1987 market crash — which notably did not end in a recession (Bloomberg)

Interview:

I sat down with investor Anthony Pompliano, the co-founder of Opening Bell Daily, to discuss the global market crash and what comes next.

Last thing:

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