Markets are seemingly in free fall, but it's not all bad news….
Here is how I am looking at how things have unfolded.
Over the past week, a few things happened to create the sell-off:
- 4.3% unemployment, highest since COVID
- The Bank of Japan raised rates from 0 to 0.25%
- Tech stocks being sold off
- Implied volatility (VIX) spiking to 60
As mentioned in last week's note, investors were looking for reasons to sell. The big-cap tech stocks were overbought, and investors have sat on significant gains, so it is natural to ensure they keep their profits.
The big news of the week was the Bank of Japan's rate hike. This cannot be underestimated as it has been the funding currency for most of the world, and in the longer term, this will help improve financial conditions globally.
Portfolios need to adjust to the changes in FX and volatility and that is what we are seeing now along with profit-taking.
With the recent weak unemployment, we can be assured that there will be a rate cut in September with a high probability of a 0.50% cut.
This will inevitably weaken the USD, which the world needs now, specifically China.
The weak JPY has put a significant strain on the Chinese economy and exports.
The Chinese economy needs to pick up for global growth to revitalize.
There are rampant recession talks now, and whether the U.S. can achieve a soft landing.
My personal view is that this is a very healthy correction, and too much money was in very few stocks. Lower interest rates will help the broader economy, allowing them more wiggle room to hire and, more importantly, a weaker USD will make exports more competitive. Investors can return to "kicking" the tires and finding good companies to own rather than owning the MAG 7 - it's all very healthy! There will be more uncertainty until we get the rate cut in September, so markets will continue to be choppy.
U.S. Real Estate
Mortgage rates have come down materially, and our overseas buyers have begun house hunting. August is looking like our strongest month yet. A weaker USD will make the purchase more affordable, and lower rates will make financing even cheaper!
Get in touch with us for our most recent mortgage rates for foreign nationals.
