Black Monday, or Manic Monday, was an event that significantly impacted global markets on August 5, 2024. It was a worldwide mass sell-off that impacted major indexes. Japan’s Nikkei was especially affected, dropping 12.4% (the second biggest drop in its history). The U.S. S&P dropped 3%. European indexes like FTSE 100 (U.K.), DAX (Germany), and CAC 40 (France) fell by about the same percentage.
These drops came with additional shockwaves, as the VIX (Volatility Index - this measures implied volatility via options placed by investors. If there is a broader spread of the estimated movement, implied volatility is higher ergo the VIX is higher) increased to 42, where moderate VIX ratings are 15-20. In comparison, the Pandemic generated a VIX of 82. Higher VIX ratings highlighted how volatile Monday was for the market.
Shares in major banks were sold off. JPMorgan Chase, Bank of America, and Citigroup were among the major banks most affected. Concern surrounding interest rates (which have closed three regional banks so far—Silicon Valley Bank, Signature Bank, and First Republic Bank) mounted in the market. Shaky investors sold off shares amidst the panic.
From July 24 to August 5, the yield on the 10-year Treasury note slipped from 4.28% to 3.78%. Yields represent the return investors expect from holding these bonds, where higher yields typically indicate "higher risk, higher reward."
Treasury notes are essentially loans made to the government, with investors receiving regular interest payments in return. When the market value of these notes goes down, they still pay the same interest rate, making them an attractive buy. However, during times of fear or uncertainty, investors flock to Treasury notes because they are considered safer investments with a lower risk of default. This increased demand drives up the price of the notes, causing the yield to slip lower.
Multiple factors converged to create a perfect financial storm on Black Monday. The most apparent factor was the instability in the U.S. market, driven by the Federal Reserve’s hesitation to cut rates, rising unemployment, and fears of a looming recession. This uncertainty led to nervous investors becoming increasingly risk-averse.
Massive tech sell-offs were unsurprising in this downturn, given widespread skepticism about valuations in the sector, especially as spending on AI development has significantly cut into profits. Notably, Nvidia CEO Jensen Huang sold $323 million of Nvidia stock before the decline, raising questions about the timing.
Yen arbitrage also played a significant role through its “unwinding.” Investors who borrowed yen when it was weak against other currencies used it to buy assets. However, Japan’s counter-inflation efforts, including hiking interest rates, strengthened the yen. This made the borrowed yen more expensive when converted to other currencies, forcing borrowers to sell off assets to cover the increased costs. This massive sell-off contributed to a sharp dip in the Japanese stock market and created a feedback loop: as yen demand increased, its value rose further, compounding losses for the borrowers.
Geopolitical tensions added another layer of uncertainty. Investors, already skittish about the violent geopolitical landscape, became more inclined to sell off assets related to global trade, energy, and defense, further destabilizing the market.
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