Posted: 2024-08-04 22:00:36

It's "a classic momentum crash" according to the equities team at Saxo Bank.

But if you didn't see it coming, don't worry. Few did.

Saxo's head of equity strategy, Peter Garnry, said the crash that started on Friday was a perfect storm, the timing of which could never be nailed.

Mr Garnry noted the key factors driving these moves were numerous.

AI (artificial intelligence) profit taking, a blow-up in a key funding currency (the Japanese yen), one-day options dominance, and record equity index concentration were all culpable in today's wreck, according to Mr Garnry.

"We have gone from high confidence, a record equity index concentration and almost no rate cuts expected in the US, to a market that is now pricing in five rate cuts by year-end in the US and equity markets tumbling in Japan," Mr Garnry said.

"The short-term outlook is right now driven by risk-management policies kicking into gear across many institutional investors.

"When CVaR (conditional value at risk — a key risk measure used in portfolio management) measures increases significantly, funds must cut exposure.

"Adding to the overall moves are factors such as AI profit taking, stronger Yen (making funding more expensive), 1-day options exacerbating moves, and finally the equity market index concentration which was the highest in 90 years just three weeks ago."

For the time being the Saxo house view is cautiously optimistic, arguing the recession probability is not higher than 33%.

"The most important point for investors is to not panic. These are the exact types of events when investors 'get out' and never get back in," Mr Garnry said.

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