Market snapshot: volatility persists for now

US markets finished better than they started but nonetheless spent the trading session largely on the ropes.

Both the benchmark S&P 500 and the Dow Jones registered their largest daily losses for almost two years, while the mega-cap technology stocks remained under pressure as the selling momentum continued from the previous trading day.

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Among the fallers were NVIDIA Corp (NASDAQ:NVDA) and Tesla Inc (NASDAQ:TSLA), which lost over 6% and 4% respectively, while Apple Inc (NASDAQ:AAPL) fell by almost 5% in a move exacerbated by the news that Warren Buffett’s Berkshire Hathaway Inc Class B (NYSE:BRK.B) had halved its holding in the iPhone maker.

Having fallen by 6% at the open, the Nasdaq recovered slightly to finish the day down by 3.4%, with some of the concerns regarding overstated valuations now having been diluted. The index remains up by 7.9% in the year to date, 

The smaller-cap sector did not escape the shake-out, having recently been the subject of some buying attention in anticipation of an interest rate cut in September. However, the fears which surfaced yesterday change the picture somewhat, in that rate cuts in a recessionary environment are rather less effective, let alone the time lag before the benefits begin to wash through fully. As such, the Russell 2000 index fell by more than 3%, leaving the index largely flat over the last month.

Other factors were also at play in stemming some of the selling tide, such as a better-than-expected manufacturing print and some soothing comments from a Federal Reserve member suggesting that one data point in isolation (the much weaker than expected non-farm payrolls report) did not constitute a trend. At the same time, Goldman Sachs increased its forecast on the likelihood of a US recession to 25%, which of course implies a 75% chance of a hard landing being avoided.

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Taken together, the fact remains that the US economy is still growing, unemployment of 4.3% need not ring alarm bells, and the earnings season so far has been largely positive. As such, emergency intervention from the Fed seems unlikely as the market returns to being a weighing machine as opposed to a voting machine. In the year to date, the Dow Jones remains ahead by 2.7% despite the current volatility, while the S&P 500 has added 8.7%, bolstered by its strong performance over the course of recent months.

The surprising scope of the fall in Japan’s Nikkei on Monday was largely reversed overnight, with the index rising by more than 10% at the open. The effect of the unwinding of the so-called carry trade, which some investors had seen as a contributor to the sharp decline, has perhaps had less of an impact than first thought, with investors pointing to the fact that in terms of the Japanese economy and its prospects, little has actually changed.

After a decline of 2% yesterday, the FTSE 100 nudged ahead in early trade, with some of the largest fallers recouping part of their losses, most notably Melrose Industries (LSE:MRO), Pershing Square Holdings Ord GBP (LSE:PSH) and Scottish Mortgage Ord (LSE:SMT).

Well-received numbers from InterContinental Hotels Group (LSE:IHG) provided another boost, while the very nature of the index, being awash with stable and established companies, may well have attracted some overseas buying interest by way of defensive positioning. Having recovered some of its poise, the premier index remains ahead by 4% so far this year, although the end to the volatile state of global markets cannot be called just yet.

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The FTSE 250 opened at a briskly positive pace, retracing some of Monday’s losses, to leave the index up by 3.8% in the year to date. The index also has a number of defensive plays within its constituents which, coupled with a lower risk of recession in the domestic economy than elsewhere, could also be attracting some investors in search of a relatively sheltered investment destination.