US stocks plummet, risk assets plummet! Will August repeat itself? This time may be worse

Shadow of a sharp fall in early August looms again, this time may be worse!

This week, a series of employment and economic data in the United States continued to be weak: ADP new job additions fell to the lowest level in over 3 years, manufacturing PMI unexpectedly cold, etc. Last night (September 6), the non-farm data fell short of expectations, adding further evidence of a cooling labor market, although the unemployment rate dropped from 4.3% to 4.2% as expected. Overall, last night's data was mixed, and it doesn't seem to be extremely bad.

However, market panic has set in, with almost all assets except U.S. Treasuries suffering losses: stocks plummeting, the U.S. dollar plunging, Bitcoin plummeting, crude oil plummeting, and even safe-haven asset gold declining.

As panic spreads, futures trading betting on interest rate cuts has exploded. The second-tier contract volume of U.S. federal funds futures set a historical record yesterday, and the trading volume for October also surpassed the historical high set by the collapse of Silicon Valley Bank that shocked the financial market that month.

Zerohedge commented that this time may be worse than August:

Putting last night's and this week's sharp declines together, it can be said that this decline is even worse than August 5th (Black Monday) because that was just a day of pain, and by the end of that week, the stock market had rebounded significantly. However, this time, the pain has just begun, it started off very badly on Monday, and ended up getting even worse, leading to a widespread liquidation...

Concerns about economic recession have intensified again, with Bloomberg's article commenting that the latest decline is reminiscent of the worries from the first decline in early August— the economy may suddenly stagnate rapidly, and the Federal Reserve may not be able to save it without taking urgent action.

U.S. stocks and risk assets plummet, futures trading betting on interest rate cuts explodes, record trading volume

"Black Monday" played out on August 5th, with a global financial market crash, the Nikkei 225 plummeting over 12%, and Nasdaq 100 index futures falling over 5%. Expectations of an "economic hard landing" sharply increased, and pessimism was magnified infinitely. However, in just two weeks, U.S. stocks transitioned from the ICU to the KTV, and global stock markets also saw V-shaped reversals.

The sharp fall in August came and went quickly. However, entering September, a series of weak employment data has kept U.S. stocks on a downward trend, with the S&P 500 index falling for four consecutive days this week, and credit spreads widening at the fastest pace since early August. On "non-farm day," U.S. stocks entered a mode of sharp decline, almost collapsing along with other risk assets.

Overnight, all three major U.S. stock indexes fell across the board: the S&P 500 index fell by 1.73%, accumulating a 4.25% decline for the week, marking the largest weekly drop since March 2023. The Dow Jones Industrial Average, closely related to the economic cycle, fell by 1%, with a cumulative decline of nearly 3% for the week; The tech-heavy Nasdaq fell by 2.6%, accumulating a 5.8% decline this week as it consolidates around technical levels.

Cryptocurrencies plunged to a seven-month low. The largest cryptocurrency, Bitcoin, fell by 5.75% to $52,980.00 at the close, marking a 10.51% decline for the week.

The US dollar weakened, while the Japanese yen strengthened.

Brent crude oil hit its lowest level in nearly three years since the end of 2021, dropping nearly 10% for the week.

Gold also did not escape the downturn, briefly hitting a historical high after the release of employment data, then dropping to intraday lows.

Not only Nvidia, but the "Big Seven" tech stocks in the US have all returned to levels seen after the plunge on August 5th.

Only bonds showed resilience, with the 10-year US Treasury yield initially dropping significantly, then surging, and then falling again to close near intraday highs.

As panic spreads, futures trading betting on rate cuts exploded last night.

Bloomberg compiled data shows that as of 1:00 PM Eastern Time on Friday, September 6th, or 1:00 AM Beijing Time on Saturday, the second-tier contract of the most actively traded US federal funds futures saw a volume of 900,000 contracts, setting a new single-day trading record for any contract since the appearance of this trading instrument in 1988. The volume for the October contract also hit a new high, surpassing the historical peak set in March 2023, the month when the collapse of Silicon Valley Bank shook the financial markets.

"Economic Slowdown May Suddenly Accelerate!" Stock Market Recognizes Recession Risks, Joins Bond Queue

"For Wall Street investors who remain optimistic about the economic outlook, days are becoming increasingly difficult."

According to a Bloomberg article, in early August, early signs of weakness in the labor market led to a sharp drop in bond yields and stocks in a volatile storm, which came and went quickly. The latest plunge reflects the same set of concerns that led to the first plunge - the economy may (suddenly) slow down rapidly, and the Federal Reserve may not be able to save it without taking urgent policy measures.

Currently, the trends in the bond and commodity markets have predicted concerns about an economic recession earlier than risk assets such as stocks, starting to price in rate cuts more quickly. In Bloomberg's view, bond investors are often referred to as "smart money" because they have the ability to anticipate changes in the economic outlook. The two-year US Treasury yield fell to its lowest level since 2022. Similarly, commodities also sounded the alarm for economic concerns, with significant declines in oil, copper, and other commodities.

Models from Morgan Stanley analysts show that as of Wednesday, the probability of an economic recession is only 9% in the stock and investment-grade credit markets, while the commodity and bond markets have priced in higher recession probabilities of 62% and 70%, respectively.

Risk assets such as stocks have not yet realized the crisis until this plunge occurred. This sharp market change "awakened" risk asset traders to start worrying about the economy, intensifying the selling of risk assets.

"Investors may only now be realizing the risks of a recession, but before this, they had hit the 'snooze' button ten times," said Michael O'Rourke, Chief Market Strategist at JonesTrading. "Whether from economic data or subsequent earnings reports, the environment is only deteriorating."

Priya Misra, Portfolio Manager at Morgan Stanley Asset Management, stated, "I don't think any market has truly priced in a reasonable probability of a recession, but all data indicates that the risk of a recession is increasing. While the debate continues on whether the Fed will cut rates by 25 basis points or 50 basis points in September, if a recession does occur, all markets will be affected. Rate cuts take time to filter into the economy."