Markets are expected to stay “highly sensitive” to any economic data that falls short of expectations, potentially leading to increased volatility until sufficient positive data alleviates growing recession fears, UBS said Monday.
By the end of last week, financial markets had stabilized.
The S&P 500 closed the week with only a slight 4 basis points decline, despite futures signaling a potential 4% drop at the start of Monday.
The VIX index, which had surged to 65 early Monday—its highest level since March 2020—fell back to 20.4 by Friday, below the previous week’s close. Meanwhile, the 10-year Treasury yield ended the week at 3.94%, nearly aligning with the 3.97% level seen before the release of the July payrolls data the prior Friday.
According to UBS, this does not suggest that the markets are now poised to resume their upward movement.
"Investors are jittery and disappointing inflation, retail sales, and initial jobless claims data this week could easily reverse the reversal last week,” analysts said in a note.
“This skittish sentiment will likely persist until investors see more evidence that the economy isn’t slowing into a recession and indications from the Fed that it will act aggressively, if necessary,” they added.
A new monthly jobs report is not due until September 6. Yet, if positive, the combination of positive data “that reinforces soft landing confidence—which we expect—along with supportive investor positioning and the start of rate cuts in September is a potent mix for risk assets over the medium term,” analysts said.
Therefore, while the recent calm in the markets may not signal the beginning of a renewed risk rally, the underlying fundamentals continue to suggest that such a rally could occur over the medium term.