The stock market has experienced a carousel of emotions this week. The pessimism that started the trading session on Monday, which turned all the world’s markets red, caused million-dollar losses and set off all the alarms, has given way to calm and a return to normality as if it were a false alarm. And in the end, in a week in which everything changed on the stock market, in reality practically nothing has changed and the main indices are at the same level as seven days ago. The tone of the market, however, has changed, and investors have been put on alert for an increase in volatility and risk.
“During the worst moments of the market, when there was an unfounded fear, from our point of view, of a recession in the United States, we think that this possibility is low or very low and that the fundamentals are solid. Money is entering the stock markets again and the market and investor sentiment are getting back on track,” explains Rafael Alonso, analyst at Bankinter.
The Ibex 35 closed the week with a fall of 0.32%. This is a figure that could have been recorded in any week in August, when there is traditionally little activity due to the summer holidays that leave the markets lethargic. But behind this figure lies a back and forth of movements that started on Monday with a fall of 2.3%, which is the worst day in the last 17 months and which makes the loss in the week an anecdote. The liquidation of shares and the feeling of crisis was widespread on a black Monday in which fears of a recession were heightened after the US unemployment rate rose for the fourth consecutive month on Friday to 4.3%.
The first warning signs came from Japan. The Nikkei, the benchmark index of the Tokyo Stock Exchange, plummeted by 12.4%, its second biggest drop in 37 years. And from the start of the session, panic in the markets spread both in Europe and the United States. The investor euphoria that had led the main world indices to record historic highs was based on blind faith in artificial intelligence and in Japan, taking advantage of the weakness of the yen. In just a few hours, these two pillars seemed to vanish. There was even speculation about an emergency intervention by the Federal Reserve (Fed) to lower interest rates and stop the bleeding in the markets, given the concern that the multimillion-dollar falls would continue in the following days.
But with the stock markets closed and after market experts considered that there was no reason to fear a recession in the United States, much less a financial storm, investors calmed their fears and the stock markets began to recover. On Thursday, moreover, with the publication of new employment data in the United States that were better than expected, the stock markets cheered up and closed the week as if nothing had happened. “A deep recession seems very unlikely, and earnings growth remains solid. The market performance in the last three weeks has clearly brought more sanity to stock prices, and the Federal Reserve will surely now fully commit to several rate cuts,” said Stephen Auth, director of investments for Equities at Federated Hermes.
The Ibex 35 closed above 11,600 points despite losing 0.32%. The German Dax rose 0.35% and the French CAC rose 0.25%. The Italian FTSE closed flat and the British FTSE fell 0.74%, which seems anecdotal after the 2.04% it lost on Monday. In Asia, the Nikkei finally closed the week with a fall of 2.46%, which seems a slight drop compared to the collapse suffered on Monday. In China, the Hang Seng closed in the green, gaining 0.85%. In the United States, the three main indices (Nasdaq, S&P 500 and Dow Jones) closed the week with losses of less than one percentage point, which are minimal, considering that on Monday they had lost around 3%.
Although the numbers remain virtually identical to the previous week, what has changed is a certain mood in the market. This week could be the beginning of a new period of volatility in the market. “Uncertainty is increasing. Although the latest earnings reports look good, on closer inspection, companies are reporting stress beneath the surface and there is growing concern that AI-related investment may have come early. Investors are faced with the challenge of moving from a paradigm based on financialization after the global financial crisis to a new one, one of higher costs and greater volatility,” explains Robert Almeida, portfolio manager and global investment strategist at MFS Investment Management.
The VIX index, a key indicator that measures unrest in the stock market, rose by 200% in just two days, reaching above 50 points, which is the highest level since the Covid-19 pandemic in 2020. During the first half of the year it had remained below 20 points and analysts themselves considered that the market was in a boring phase. With the inauguration of a new phase of greater oscillations in the indices, they estimate that volatility could be between 25 and 30 points.
Amid Monday’s panic, the debt market has benefited from a transfer of funds. On the one hand, fearful investors were looking to get out of riskier assets in search of refuge. And, on the other, they are trying to position themselves in light of the increased expectations of interest rate cuts. The market is already counting on a normalisation of monetary policy in the United States from September, which has caused the yield on government debt to fall. Thus, the 10-year bond has remained below 4% since last week, after having remained above that figure throughout the year. The fall in yields has also been reflected in Europe. The Spanish bond with a maturity of 2034 is hovering around the 3% barrier and the German 10-year debt is at 2.2%.
With calm returning to the fixed-income market, Brent also regained lost ground, reaching $78 per barrel (last week it closed at $77.5) and breaking a four-week losing streak. The black gold had been suffering from the lack of understanding between OPEC members on crude oil supply restrictions.
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