US Market Selloff Stokes Recession Fears, Trounces Rate Cut Cheer

• Mounting unease over the U.S. economic outlook and a seasonally weak month for stocks have created another perfect storm of global market volatility, leaving investors scrambling for protection and fearing another round of currency chaos.
• Following a rapid recovery for risky assets such as stocks and high-yield bonds from a chaotic early August selloff, traders have lost their short-lived optimism that U.S. interest rate cuts would support growth.
• Instead, they appear to be already getting ahead of U.S. jobs data on Friday that may repeat last month's weak report, with Tuesday's weak U.S. manufacturing data triggering fresh selling. Wall Street's S&P 500 share index fell over 2.0% on Tuesday. Meanwhile, the VIX index of expected U.S. equity volatility has hit a one-month high, as choppy currency trading threatened the dollar and other haven currencies.
• Markets were dealing with uncertain inflation but growth was resilient," said Florian Ielpo, head of macro at Lombard Odier. "That situation seems to be changing; the new uncertainty is how deep will the slowdown be." The shaky start to September follows an early August global rout as a Japanese rate increase and the U.S. jobs data wrecked popular carry trades betting against the yen. Carry trades involve borrowing at a low cost in one currency to achieve higher returns from investments in another currency.
• Echoing August's pain, highly valued tech stocks that investors crowded into are taking a beating. The shakeout followed investor unease that stocks and bonds had started September with different stories. Stock markets had priced robust company earnings while government bonds rallied in anticipation of deep U.S. rate cuts and recession risk.

(Source: Reuters)