Market Watch: Brace for a 2nd wave in stock-market volatility, and this one could be Lehman-like, says Nomura

Article by Mark DeCambre in Wall Street Journal Market Watch

A rally in stocks on Tuesday may take shape after an ugly Monday selloff, but any rebound ought to be treated with a heavy dose of skepticism, and as preparation for the next wave of selling, warns one quantitative analyst at Nomura.

Macro strategist Masanari Takada, in a note on Tuesday, said Monday’s tariff-inspired tumble played out as he expected, but he speculates that the volatility spike that Wall Street investors experienced, after President Donald Trump last Thursday announced 10% tariffs on China imports not already subject to trade duties, is nothing compared with what could be in store later this month or next.

Takada explained it this way:

“Once the first wave of volatility has passed, global equity markets are likely to experience a spontaneous rebound. Contributing factors to such a relief rally could include expectations for a substantial rate cut by the Fed at the September FOMC meeting and stock purchases made by short-term contrarian investors. However, for the three reasons we spell out below, we would expect any near-term rally to be no more than a head fake, and think that any such rally would be best treated as an opportunity to sell in preparation for the second wave of volatility that we expect will arrive in late August or early September. We would add here that the second wave may well hit harder than the first, like an aftershock that eclipses the initial earthquake. At this point, we think it would be a mistake to dismiss the possibility of a Lehman-like shock as a mere tail risk.”

To read this report in Market Watch in its etirety, click here.