Update: The Nikkei has the biggest 2-day drop in history. Bitcoin is down 7% today and 23 percent in the last week. 18-year high margin positions hitting everything but gold.

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Record Margin Positions

Bloomberg reports Forced Margin Selling Seen Exacerbating Japan Market Rout

The swift downturn in the Japanese stock market likely triggered a massive wave of forced selling among retail investors, deepening the rout.

The Topix index plunged more than 7% with companies such as Mitsubishi Heavy Industries and Sumitomo Mitsui Financial diving more than 15%. The scale of selloff is such that some market players think individual investors are now being forced to dump stocks they had bought on margin.

Retail investors’ margin buying position rose to a 18-year high in late July even as the Nikkei slipped from its historic peak. Investors who have bought stocks using credit are often forced to close their positions when stock prices fall more than expected, unless they have enough extra cash for collateral to deploy.

Hopes around higher wages and economic growth have encouraged Japanese investors to buy stocks. The trend was strengthened by new tax-free investment accounts that the government started this year. With the Nikkei 225 on the verge of wiping out almost all of its gains since the start of year, the bear market will test the durability of Japanese individual investors’ renewed appetite for domestic stocks.

Bitcoin Plunges

Bitcoin is down 7 percent on the day and 23.4 percent in the past week.

Stocks Routed by US Recession Risk

Reuters reports Stocks Routed by US Recession Risk, Bonds Eye Rapid Rate Cuts

Japan’s Nikkei (.N225), opens new tab shed an eye-watering 8.0% to hit seven-month lows, marking its biggest three-session loss since the 2011 financial crisis. MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS), opens new tab lost 2.8%.

Japanese 10-year bond yields fell a steep 17 basis points to the lowest since April at 0.785%, as markets radically reconsidered the prospect of another hike from the Bank of Japan.

Treasury bonds were in demand with 10-year yields hitting 3.723%, the lowest since mid-2023. Two-year yields dropped to 3.818%, having already fallen 50 basis points last week , and could soon slide below 10-year yields, turning the curve positive in a way that has heralded recessions in the past.

The worryingly weak July payrolls report saw markets price in a near 70% chance the Federal Reserve will not only cut rates in September, but ease by a full 50 basis points. Futures imply 115 basis points of cuts in the 5.25-5.5% funds rate this year, and see rates around 3.0% by the end of 2025.

“We have increased our 12-month recession odds by 10pp to 25%,” said analysts at Goldman Sachs in a note, though they thought the danger was limited by the sheer scope the Fed had to ease policy. Goldman now expects quarter-point cuts in September, November, and December.

“The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks,” they added. “If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September.”

Analysts at JPMorgan were even more bearish, subscribing a 50% probability to a U.S. recession. “Now that the Fed looks to be materially behind the curve, we expect a 50bp cut at the September meeting, followed by another 50bp cut in November,” said economist Michael Feroli.

In commodity markets, gold gained a safety bid and rose to $2,456 an ounce.

Are the “Magnificent 7” Stocks Today’s Version of the “Nifty Fifty”?

Earlier today I asked Are the “Magnificent 7” Stocks Today’s Version of the “Nifty Fifty”?

The “Magnificent 7” are TSLA, AAPL, META, GOOG, MSFT, AMZN, NVDA. Buy and hold forever?

Dramatic 1-Day and 1-Week Changes in Bond Yields

For discussion, please see my August 3 post Dramatic 1-Day and 1-Week Changes in Bond Yields, What Happened?

Are too many cuts priced in or not enough?

That’s the question. I expect two cuts in September. Looking out to next year, I think too many cuts are priced in.

Rate Cuts Coming

Also on August 3, I commented Big Changes in Fed Interest Rate Cut Expectations This Year and Next

Rate Expectation Percentage Point Change

• Sep 2024: -0.13 PP to 4.94% (-0.43 PP from current) 1.7 quarter-point cuts
• Nov 2024: -0.30 PP to 4.53% (-0.83 PP from current) 3.3 quarter-point cuts
• Dec 2024: -0.34 PP to 4.21% (-1.16 PP from current) 4.6 quarter-point cuts
• Jan 2025: -0.36 PP to 3.98% (-1.39 PP from current) 5.6 quarter-point cuts
• Mar 2025: -0.38 PP to 3.71% (-1.66 PP from current) 6.6 quarter-point cuts

Recession Has Started

On July 8, I wrote Weak Data Says a Recession Has Already Started, Let’s Now Discuss When

I’ve seen enough. A recession has started. Let’s discuss starting with a very good indicator that has few false positives and no false negatives.

My follow-up post was on August 2.

August 2: The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered

A recession indicator based off rising unemployment triggered in July. Claudia Sahm, a former Fed economist, takes credit for an indicator she did not invent. Let’s discuss.

Weakening data explains the recession call. Yield curve action provides a confirmation signal.

Global selloffs add to recession risks. Sentiment matters.

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