In equities, the VIX volatility index at one point on Friday had doubled from the previous day.
The stampede to unwind carry trades helped push the yen up nearly 5% against the dollar last week – the Japanese currency has only had three better weeks in the past 25 years.
Plunging U.S. bond yields may ease financial conditions – Goldman Sachs’s emerging market financial conditions index on Friday fell to its lowest since March – but they’re loosening for ‘bad’ reasons, namely recession fears.
Hopes for the much-vaunted U.S. economic ‘soft landing’ appear to have completely evaporated, replaced by fears of a ‘hard landing’.
Traders are now attaching a 70% chance to the Fed cutting rates by half a percentage point next month, and are pricing in 115 basis points of easing by the end of the year and over 200 bps by next June.
High yield corporate debt markets will be worth watching closely. This is where the first signs of a ‘credit event’ usually appear, heralding wider retrenchment across businesses, rising unemployment and ultimately recession.
High yield U.S. debt spreads over Treasuries jumped on Friday to the widest of the year of more than 370 bps, but that was mostly due to the slump in government bond yields rather than investors dumping corporate debt. If that dynamic changes, hold onto your hats.
Monday’s economic and events calendar in Asia includes service sector purchasing managers index data from across the continent including China, inflation figures from Thailand, GDP numbers from Indonesia and some Japanese earnings.
