Today, for lack of a better way of saying, was weird.
Inflation came in cooler than expected, and the initial reaction was positive for the S&P 500. The index pushed higher, yields on Treasurys fell, and small-caps started showing some real momentum. As the day progressed from the market open though, some really bizarre market behavior started to show itself. I have repeatedly said Nvidia (NASDAQ: NVDA) can literally take down the entire stock market, and it seems to have done just that. The S&P 500 turned sharply lower, while at the same time the Russell 2000 pushed to the day’s highs, crossing up over 3%.
What in the world could explain this? It’s actually pretty obvious. For so long, small-caps have been a source of funding by more tactical and alternative managers. Why take on stock market risk when you can short small-cap companies and, dollar-for-dollar, buy large-cap ones — especially Nvidia? The spread differential, which is emblematic of relative weakness in small versus large, became a crowded trade. All it took was a spark to unwind that.
It’s more than this though. Did you notice the yen? There was an explosion so high that people on X were saying it looks like the Bank of Japan is indeed intervening to save the currency.
How far will Japan go to save the yen?
Recall my thesis I’ve laid out for many months here on InvestorPlace about the reverse carry trade, whereby Japan would panic and force liquidations of borrowed debt (which has been deployed elsewhere around the globe) to save the yen. I don’t believe it’s a coincidence that the yen has a big up day the same day Nvidia is down hard. It makes you wonder how much of the move in Nvidia was being driven purely by speculators who margined their trades with next-to-nothing costs from Japan to fund the stock’s momentum
Meanwhile, in a stunning move, utilities are surging on a relative basis, which is pretty risk-off. Large-caps are also acting risk-off while small-caps are clearly acting risk-on. At the same time, gold is up and homebuilders are strong. To put it mildly – everyone is confused. It’s been a weird day for stocks and bonds.
When it settles out, though, the yen will be the real story to watch and the risks I’ve highlighted remain very much in play. Small-caps, should they turn here, will confirm that the inflation data that everyone initially cheered may indeed mean the Fed is already too late to stop a deflation pulse to come.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
