Falling knives have hit the floor

We've caught a brief respite as some falling knives finally hit the floor. A dash of soothing words from Fed officials, particularly Daly, has begun to calm the market's frayed nerves. However, all eyes remain glued to Tokyo, the epicentre of the carry trade unwind drama, where the effects have been particularly pronounced, stirring up significant turbulence for traders and investors.

The yen, yesterday's antagonist amid the dramatic selloff, is showing signs of becoming today’s hero. Its current trajectory suggests a potential stabilizing force within the ongoing market tumult, offering a glimmer of hope for exporters and investors who have endured the storm.

In the cacophony of current market chaos—where every analyst sports a theory, and each headline screams louder than the last about carry trade unwinds, commodity crashes, and inflation expectations—it's easy to get lost. But let’s cut through the noise: the recent VIX spike and yield curve steepening are desperate cries for an emergency FOMC meeting in what could be seen as the ultimate Fed shakedown.

Though a drastic rate cut—perhaps 50 or even 75 basis points—might initially cause market jitters, such aggressive moves are too tempting for the correlation enthusiasts not to push stocks higher unless the data unmistakably points to a recession. In that case, not even a Fed cavalry could halt the onslaught.

Fortunately, some positive U.S. data yesterday helped steady the ship somewhat as we pass the risk baton to Europe. It feels like our VIX drama queen might relax a bit, anticipating a widely expected Fed dovefest. Yet, the question lingers: have we truly seen the last of the great carry trade unwind?

With implied G-10 breakevens at 152 and an overnight print at 142, I'd be inclined to congratulate those traders if the COTR still shows significant short JPY positions. Nonetheless, the saga of carry trade unwinds has been like a summer blockbuster, rolling since around our July unwind call and gathering momentum as the Japanese Yen made a dramatic leap from 160 to 152 against the Dollar pre-BoJ. It's been quite the show! Popular trades like long MXNJPY and short CNHINR have likely taken their final bows, indicating that the panic in carry town might be over. The market's version of a scary movie night might be wrapping up, with traders ready to swap their popcorn for a more stable snack.

Oil markets

Crude oil prices tumbled to their lowest point since January as investors rushed away from risk assets amid widespread volatility in global financial markets. This sell-off was exacerbated by a month of disappointing macroeconomic data from China and escalating fears of a potential U.S. recession. These concerns tipped the balance, prompting investors to flee equities and most commodities for safer havens.

Despite this backdrop, oil prices significantly reverted late in the session, sparked by emerging supply-side issues. Notably, Libya’s largest oil field ceased production on Monday after the operator progressively reduced output. The specific reasons behind this shutdown remain unclear, adding another layer of uncertainty to an already tense oil market landscape.

Adding to the complexity, recent geopolitical tensions have flared, including a suspected rocket attack on Al Asad Air Base in Iraq, which targets U.S. and coalition forces. This incident could potentially lead to further destabilization in what is already a volatile Middle East, a region often likened to a hornet's nest due to its fragility and the ease with which tensions can escalate.