Yen carry unwind: August 5 crash, full recovery by month-end

August 2024 was dominated by the first week's violent yen carry unwind and subsequent recovery. The July 31 BoJ 15 bp hike and weak August 2 NFP (114k vs 175k, Sahm Rule triggered) set up the Monday August 5 crash. The Nikkei 225 fell 12.4% (worst since 1987). US equities opened down 4%. VIX opened at 65 (from 23 Friday close). S&P 500 ultimately closed -3%.

The recovery was as fast as the decline. Forced-selling pressures eased by Tuesday. Systematic strategies re-entered through August 8-12. By month-end the S&P 500 had fully recovered and extended to new highs at 560 (from the August 5 intraday low of 510). The round-trip illustrated that the August 5 crash was positioning-driven rather than fundamentals-driven: no recession confirmation followed, and earnings season was resilient.

Powell's August 23 Jackson Hole speech was the catalyst for the second-half-of-month rally. He explicitly committed that "the time has come" for policy adjustment, removing ambiguity about September cuts. Bond markets priced 100% probability of a September cut with 50% odds of 50 bp. The Fed would deliver the 50 bp cut September 18. Small caps and rate-sensitive sectors led the recovery, with IWM gaining 3.5% in the final two weeks. The month closed with S&P 500 up 2.3%, masking the extreme intra-month volatility.