American equity markets fell off a cliff in Thursday trading as worries over a double dip recession dominated the market and sent stocks reeling. The Dow plunged by over 510 points to finish the session lower by 4.3% while the S&P 500 and the Nasdaq fell by 4.8% and 5.1%, respectively. Although losses were broad and deep throughout the market, the largest falls came in the basic materials, financials, and tech spaces, while consumer and service firms did better than most. Commodity markets were also hard hit on the day, thanks in large part to a strengthening dollar. Gold finished the day down just 0.8% while crude tumbled along with the market, sinking by close to 6% in the session. Softs also exhibited a great deal of weakness as wheat lost more than 3.2% and orange juice closed lower by nearly 4%.
One of the few winners on the day came in the U.S. Treasury and currency markets as the U.S. dollar maintained its ‘safe haven’ status and attracted massive inflows from other nations. The U.S. dollar index rose by $1.24 to finish above the $75 mark as the greenback gained more than 1.6 cents against the pound and a full two cents against the euro. Furthermore, the dollar gained saw its value soar against the yen as the Bank of Japan intervened in the currency markets, helping to push the Japanese currency to a rate of 79 yen per dollar. Meanwhile, in Treasury bonds, demand for U.S. government debt reached new heights as the Ten Year note saw yields crater by .20% while the two year saw yields sink by .08%, all the way down to 0.27%, a fresh low for the short term issuance. This suggests that the market is extremely fearful right now and that demand for alternative and safe haven assets continues to be the name of the game here in August.
One of the biggest ETF winners on the day was the iPath S&P 500 VIX Short-Term Futures ETN (VXX) which rocketed higher by 20% on the day. This incredible gain, which came on volume that approached 48.8 million shares, was largely a result of the market crash today and the high demand for alternative and inversely correlated assets. Since dollar strength was hurting gold and pushing T-bill yields to fresh lows, many investors sought refuge in this ETN representation of the ‘fear index’ as a way to protect portfolios. “It’s fear,” Luke Rahbari, a VIX options trader at Stutland Equities LLC in Chicago, said in a telephone interview. “There’s definitely a lot of uncertainty in the market, whether you want to talk about European banks, European sovereign debt, slowing growth in the U.S.” As a result, VXX is now up close to 30% over the past week alone, suggesting that investors who saw this turmoil coming are sitting on a very nice gain in this short time period [see charts of VXX here].
One of the biggest ETF losers in the session was the PowerShares WilderHill Clean Energy Portfolio (PBW) which plummeted by 8.2% on the day. Today’s horrendous losses came as traders dumped risky equities– like those in the clean energy field– and moved their assets to more stable corners of the investing world instead. Additionally, many also probably sold off their holdings in PBW as oil prices cratered, making clean energy products less appealing in comparison. ”Globally, you’ve seen every equity market fall off,” said Carl Larry, director of energy derivatives and research at Blue Ocean Brokerage in New York. “Crude is now following that with the idea that, as the economy goes, that’s the way oil will go.” Thanks to these twin fears of demand and overall market risk, it has been a very rough week for investors in PBW. The fund has declined by over 13% since the start of the week suggesting that clean energy may be entering a new bear market if one hasn’t already begun for this slice of the equity world [see fundamentals of PBW].
Disclosure: Long PBW.