Equities Post Historic Rally After Flash Crash
Equites have gone up in pretty much a straight line since their gap down nine days ago following the biggest single day drop in Japanese stocks since 1987. In that span, the NASDAQ has rallied more than 10% off its Monday open while the S&P 500 is up about 8%. Japanese stocks are up 18% off their low.
For only the third time since 1990 the VIX index would hit 60 intraday. The measure of implied volatility previously hit 60 during the Global Financial Crisis and the COVID Crash.
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- In 2008 when the VIX first hit 60, the S&P 500 was down 27% over 20 days and more than 40% from its previous peak.
- In 2020, the S&P 500 was down 19% over 13 days as the 60 level was first breached.
- This month the S&P 500 would drawdown only 9% on an intraday basis and less than 5% on a closing basis.
The VIX has done a remarkable retrace from above 60 to back under 16 in just 8 days. In 2008, it would take more than 375 days for the VIX to trade under 16. The COVID recovery in 2020 was one of the fastest stock market recoveries and even then, it took over 280 days for the VIX to trade under 16 after hitting 60.
Inflation Supports Likely Interest Rate Cuts in September
Inflation was the main economic topic this week. Producer prices came in lower than expected with core Producer Price Index (PPI) rising 2.4% versus the previous year. Service inflation has been the biggest contributor to higher inflation readings. This may be changing in the near-term as service’s final demand producer prices were down 0.2% on the month.
The Consumer Price Index (CPI) aligned with expectations and now sits at 3.2% versus the previous year. CPI core services inflation was up 0.2% on the month. This was preceded by two negative readings in a row. The result is a 3-month cumulative rise of just 0.12%, the lowest since COVID. For comparison, the 3-month rate of change for core services CPI peaked in March 2024 at 1.9%. The Fed’s preferred inflation gauge is the core Personal Consumption Expenditures (PCE) price index and this runs cooler than CPI. Core PCE has had year-over-year inflation below 3% for six consecutive months.
The Fed Funds futures are pricing a 27% chance of a 50-basis point cut at the September Federal Open Market Committee (FOMC) meeting. This was 100% during the market sell-off on Monday but has retreated somewhat given that equities have bounced back so strongly.
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Sources: BTC Capital Management, Bloomberg
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