We’re starting to see some real volatility developing in the markets and, while it’s not necessarily showing up in the VIX, it is occurring in three very important assets - NVIDIA (NASDAQ:NVDA), Bitcoin and lumber.
For better or worse, NVIDIA has become the market for a lot of people. Everybody loves the stock when it goes up, but they find out how strong their stomach is on the way down. This is the first time since April where shareholders have gotten a real gut check and how well they handle it could determine the next leg of this market. I’ve said repeatedly that NVIDIA has the potential to drag down the entire market right now. We could be in the midst of our first big test of that theory.
Bitcoin has been on a similar trajectory, dropping nearly 20% from peak to valley in the month of June. While volatility is the norm in crypto, when crypto and NVIDIA are both dropping sharply at the same time, it’s a sign that investors aren’t optimistic about growth and could be pivoting to defense quickly.
I don’t think it’s an accident that Treasuries and utilities started rallying at the market close Monday at the expense of the S&P 500 and Russell 2000. I think it’s too aggressive a move to be purely about the Fed and the direction of interest rates and more about a change in investor sentiment.
The 9% drop in lumber prices last week is usually a direct reflection on economic optimism as well. With the housing market locked up due to high mortgage rates, housing starts slowing and home prices looking like they may be rolling over, one of the cornerstones of the U.S. economy looks like it’s softening. This could be a short-term thing, but I don’t like that all three of these assets are declining sharply at the same time.
As I’ve mentioned here in recent weeks, consumer behavior and sentiment, I believe, are getting ready to turn. We’ll get personal spending & income numbers later this week, but we keep getting more signs that the consumer is vulnerable. Management teams at both Walmart (NYSE:WMT) and Target Corporation (NYSE:TGT) have been warning of cautious outlooks due to high inflation & lower spending and the likelihood that they’re going to need to offer deep discounts on merchandise in order to encourage sales.
Also, the U.S. Michigan current economic conditions index dropped from a 3-year high in March to its lowest reading since December 2022 in June. Those kinds of sharp declines in the data and warnings from retailers don’t usually happen without a reason and I think we’re very near the point where the consumer finally breaks.
The Japanese yen has been hovering around the 160 level for the past few days and I wonder if the market is kind of treating it as a de facto ceiling for the currency. The BoJ has intervened around these levels in the past and has stated repeatedly that it’s standing ready to intervene again at any time. That being the case, I think some forex traders may be establishing positions in the yen here hoping that a BoJ intervention could result in a short-term pop.
Either way, the yen is clearly still in a very weakened state and it’s likely going to take some action from the central bank in order to keep it from free falling. We know that interventions haven’t worked so far, which leaves rate hikes as the only viable option for strengthening the currency.
That’s why I think there’s a good chance the BoJ pulls the trigger this summer and begins the long process of trying to normalize policy conditions. Of course, that could also be the start of the reverse carry trade that unwinds a boatload of short yen positions and creates a global currency crisis. Asset managers are already at record short yen positions and any move by the BoJ to support the yen could create a snowball effect that spills over into the entire global risk asset market.
The Japanese banking sector looks like it’s in trouble.