Trade Coffee | August 6th, 2024

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GOOD MORNING

Here's everything you need to know today: So, as if Monday’s market bloodbath wasn’t enough, brokerage firms like Charles Schwab added some extra spice to the crap taco with technical issues right in the middle of the global sell-off. Schwab’s platforms crashed harder than global equities, leaving clients frantically refreshing their screens. The company’s X account sheepishly admitted to the glitch, apologizing profusely while their servers presumably smoked like a 1990s dot-com startup. Hold times were longer than usual? You don’t say.

As the Dow plummeted over 1,200 points at its lowest, before closing down a mere 1,034 points (a modest 2.6% drop), Schwab’s stock managed to only dip 1.7%. Bravo, Schwab. Your tech mishap was almost as impressive as your stock’s resilience. Social media lit up with frustrated users unable to access their accounts, but by 12:38 p.m. ET, Schwab declared victory over the technical gremlins. Meanwhile, Fidelity and Vanguard also chimed in, assuring everyone that their hiccups were resolved too. Because nothing says “we’ve got this” like simultaneous industry-wide outages.

One online trading platform that didn’t crash on Monday? Robinhood. Yes, we are living in The Upside Down.

Let’s dive into more detail below.

BREAKING NEWS
Hey, look at us, not the carnage that is your portfolio right now. Seriously, breathe… don’t make us mercy slap you. Okay, good, now let’s talk about what’s really going on here.

The stock market is in freefall, sure, but it's also dropping from a high that never felt real to anyone who's been in the game for more than a decade. The panicky corrections we’re seeing are big players finally getting blown out of trades they’ve been leveraging in a bananas interest rate environment to create money out of thin air. Ever heard of the “Yen carry trade”? Let's break it down.

WHAT HAPPENED
Last week, Japan unleashed a $36.8 billion Yen intervention after the currency tanked to a 38-year low against the US Dollar. The Bank of Japan finally decided to bump interest rates to a "whopping" 0.25% from the laughable 0% to 0.1%, hitting levels not seen since 2008. This triggered a meltdown in the so-called carry trade, where investors borrow dirt-cheap Yen and chase higher yields elsewhere. Yen-funded carry trades were the darling of emerging markets, but with the BoJ hiking rates and promising more, those trades are unraveling faster than you can say "financial fiasco."

And if it looks like a sell-off and smells like a sell-off, then trading algorithms and panicky wealth managers who thought they could have a relaxing August think it’s a sell-off, and then it becomes an actual sell-off. It’s like if Pinocchio was trying to set fire to your 401(k).

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BREAKING NEWS
What a weekend, and what a way to start the week! This morning, the U.S. woke up to a sea of red, with nearly $4 trillion wiped from the stock and crypto markets over the past week.

The VIX indicated the third biggest crisis in history, trailing only the 2008 financial meltdown and the COVID-19 pandemic. Bitcoin and crypto markets were hit hard, with $1.04 billion in liquidations over the last few days.

However, there's a different story unfolding with Bitcoin, especially in the realm of ETFs. This shift underscores Michael Saylor’s long-standing mantra of “stomaching the volatility” and continuing to acquire more Bitcoin.

WHAT HAPPENED
Let’s kick off with some good news: the ISM Manufacturing PMI, a key indicator of the U.S. manufacturing sector's health, is up. Service businesses rose to 51.4% from 48.8% in June, beating expectations. Readings above 50% mean good things for the economy, easing those pesky recession fears. Steve Miller from the ISM survey said most companies are either stable or growing slowly, a big relief since June's reading was the lowest since May 2020.

Now, the Bank of Japan decided to play Chaos Queen by raising its key interest rate to 0.25% from 0.1% to stabilize the yen. This move shook up the infamous Japanese carry trade, making yen borrowing pricier and causing some unwinding of trades. The result? Japanese stocks tanked, and global markets followed suit. The Nikkei dropped nearly 13%, its worst hit since 1988.

And just to keep things interesting, Charles Schwab and other brokers had login issues during the sell-off. Secretary of State Tony Blinken warned G7 about a potential Iran and Hezbollah attack on Israel, possibly starting today. The Magnificent Seven stocks kept dragging the market down.

Over in crypto land, Bitcoin and friends lost almost all their gains from the year. The idea of Bitcoin as a "hedge" is looking shaky. Even Vitalik Buterin dumped some Ethereum and a meme coin he got gifted. But, ever the optimist, Buterin tweeted about fixing "cross-L2 interoperability problems" in the Ethereum ecosystem. Because when you have a vision, nothing else really matters, right?

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BREAKING NEWS
In case you missed it amid the equities bloodbath, the bond market is serving up its own fresh slice of chaos. Mortgage bonds got absolutely smoked on Monday, trailing far behind Treasuries as investors panicked over potential rate cuts that might trigger a refinancing spree. Fun times, right?

WHAT HAPPENED
Fannie Mae’s current coupon mortgage bonds, the go-to benchmark, saw their spreads balloon by 0.07 percentage points to 1.41%—the biggest one-day widening since April. Investors are clueless about where interest rates are headed. The ICE BofA MOVE Index, which tracks rate volatility, spiked to its highest level since April on Friday, signaling that everyone and their dog expects wild rate swings.

This uncertainty is sending shivers down the spines of MBS holders because rate changes can lead to a wave of borrower refinancing. When everyone’s refinancing their mortgages, investors have to kiss their sweet returns goodbye sooner than expected. But hey, there's a silver lining: mortgage rates are dropping, giving borrowers a chance to snag some cheap loans while the market's in a tizzy. But also, we’ve learned from experience that falling MBS prices are not great.

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1. UBS says Japan's stock sell-off will continue: 'Going into Japan now is like catching a falling knife'

UBS analysts predict the downward trend in Japanese stocks will persist, as the Nikkei 225 and Topix indices have already dropped over 7%, nearing bear market territory. The analysts likened investing in Japan at this time to "catching a falling knife."

2. Bitcoin crashes below $53K wiping out $600M in leveraged longs

Bitcoin's value dropped below $53,000 for the first time in six months, causing more than $644 million in leveraged long positions to be liquidated. The cryptocurrency market experienced a significant downturn as investors moved away from risky assets.

3. Global market selloff intensifies, powering bond rally

The global stock selloff deepened, driving investors toward the relative safety of bonds. This shift was triggered by concerns over the Federal Reserve's delayed policy support amid signs of a slowing U.S. economy, leading to significant declines in Japanese shares and a broader market rout.

4. Apple Supplier Stocks Slump After Berkshire Nearly Halves Stake

Apple's supplier stocks saw significant declines after Berkshire Hathaway nearly halved its stake in the tech giant. This move by Warren Buffett's investment firm added to the broader market selloff, impacting technology stocks heavily.

5. US yields slide as traders bet on big Fed rate cuts after weak data

U.S. Treasury yields dropped sharply as traders began pricing in significant rate cuts from the Federal Reserve. This reaction came after weak jobs data heightened fears of a looming recession, prompting a flight to safety among investors.

6. Dow sinks 1,000 points as worries deepen over U.S. economy

The Dow Jones Industrial Average plummeted by 1,000 points as fears about the slowing U.S. economy intensified. Investors reacted to a series of weak economic reports and growing concerns about the potential for a recession.

7. Warren Buffett's decision to sell stocks and raise record cash before sell-off sends wake-up call

Warren Buffett's Berkshire Hathaway's decision to sell a significant portion of its top holdings and raise record levels of cash before the market sell-off is viewed as a strategic move highlighting Buffett's cautious outlook on the market's future.

8. Stock market sell-off sparks ominous trending topics on social media

The ongoing stock market sell-off has spurred a rise in ominous trending topics on social media, reflecting widespread investor anxiety and speculation about tougher economic times ahead.

9. Google loses antitrust case over search

A federal judge ruled that Google violated antitrust laws by maintaining a monopoly over online search services. This landmark decision could lead to significant changes in how the company operates and impacts its business model.

10. Palantir raises annual revenue forecast on AI strength; shares surge

Palantir Technologies raised its annual revenue forecast, citing strong demand for its AI software. The company also reported its largest quarterly profit, leading to a surge in its stock price.

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Today's insights are courtesy of Trade, America's #1 specialty coffee marketplace. Enjoy better coffee at home with Trade.

Learn More Now ➔