Growth scare sets up markets for fresh bout of volatility

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Investors are preparing for renewed volatility when global markets reopen on Monday, as traders fret that the Federal Reserve has been too slow to respond to signs the US economy is cooling and may be forced to play catch-up with rapid cuts to interest rates.

Weak US jobs data on Friday piled further pressure on a market already buckling under an investor exodus from expensive technology stocks, with the Nasdaq index falling into correction territory last week and haven Treasuries rallying sharply.

“The narrative has literally changed overnight,” said Torsten Slok, chief economist at Apollo. Investors were weighing up whether to treat Friday’s jobs number as a statistical quirk or whether the US was “now in a more severe slowdown period”, he added.

The Fed kept rates on hold when it met last week, but the severity of the market reaction after the jobs data indicates that investors believe the central bank may have made a mistake in not cutting rates.

JPMorgan economists joined the growing chorus of Wall Street strategists over the weekend calling for the Fed to reduce rates by 0.5 percentage points at its next two meetings, in response to nascent signs of weakness.

Srini Ramaswamy, JPMorgan’s managing director of US fixed income research, wrote on Saturday that he had turned “bullish on volatility” given investors’ newfound uncertainty about the path of interest rates and summer illiquidity.

The Vix index of expected US stock market turbulence — commonly known as Wall Street’s “fear gauge” — climbed as high as 29 points on Friday, the highest since the US regional banking crisis in March last year.

A sell-off which started in richly valued big-tech stocks, many of which reported earnings last week, gained wider traction after the Fed decision and jobs data.

The Nasdaq Composite, the tech heavy US index, finished the week 3.4 per cent lower and has declined more than 10 per cent since July’s all-time high. Treasuries rallied, with the yield on the US 10-year hitting its lowest level since December at 3.82 per cent.

On Saturday, Warren Buffett’s Berkshire Hathaway disclosed that it had halved its position in Apple in the second quarter, while raising its cash position to a record $277bn and buying Treasuries.

Investors are betting the Fed will lower borrowing costs by more than a full percentage point by the end of the year to counter a weakening economy.

“I think interest rates are too high,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. While the economy was still “relatively strong”, the Fed needed to get rates to around 4 per cent “sooner rather than later”, Reider said.

However, Diana Iovanel, senior markets economist at Capital Economics in London, argued that equity “valuations are still far from pointing to an economic cataclysm”.

“Renewed fears of a US recession have increased the chances of additional rate cuts from the Fed. But we don’t think that the US economy will stand in the way of an equity rally for much longer.”