Volmex Research Series

Crash of August 5, 2024
Kadir Gokhan Babaoglu, PhD
Volmex Labs
August 7, 2024

On August 5, 2024, global markets experienced significant declines, with the Nikkei 225 fallingby 12%, the S&P 500 by 3%, the NASDAQ by 3.4%, Bitcoin (BTC) by 7.2%, and Ether (ETH)by 10.1%. The VIX (S&P 500 Implied Volatility) spiked to 65.73 from 23.39, while the BVIV
(BTC Volmex Implied Volatility Index) jumped to 89.04 from 59.65 and the EVIV (ETH Volmex
Implied Volatility Index) rose to 102.33 from 59.78.

Many initially attributed these unprecedented moves to the Bank of Japan's (BOJ) interest rate
hike to a historic high of 0.25%, announced on July 31. However, the market reaction following
the BOJ's decision was relatively muted, with no immediate adverse effects observed.
The events leading up to the crash suggest that factors beyond the BOJ's rate hike were at play.
After the Federal Reserve opted to keep interest rates unchanged, economic data released on
August 1 and August 2, 2024 painted a grim picture: a contraction in the manufacturing sector
and rising unemployment claims. Additionally, corporate earnings reports began to reveal
underlying weaknesses, further unsettling investors.

Japan, with its markets opening earliest after the weekend, became a focal point as Japanese
investors, particularly those with leveraged positions, began to unwind in response to aconfluence of factors: higher domestic interest rates post-BOJ decision and signs of a weakening
U.S. economy. This early sell-off in Japanese markets set the stage for a cascade of market
declines worldwide, as fears of a global economic slowdown intensified.
Thus, the primary catalyst for the widespread market crashes on August 5 was not solely
the BOJ's rate hike but rather the growing concerns about weakening U.S. economy. The
synchronized response across global markets underscores the interconnectedness of financial
systems and the significant impact of U.S. economic health on global investor sentiment.

What Happened?
On July 31, 2024, the Bank of Japan raised its key interest rate to approximately 0.25%, up froma previous range of zero to 0.1%. This was the BOJ's second rate hike in 17 years, a move aimed
at addressing the yen's depreciation and rising import costs. The market reacted positively to thiscautious shift away from Japan's long-standing near-zero interest rate policy, with the Nikkei 225
index climbing 1.5%.
In contrast, the US Federal Reserve held its short-term interest rates steady at 5.25%-5.5% on thesame day, the highest level in 23 years. Although inflation is nearing the Fed's 2% target, Chair
Jerome Powell indicated that a rate cut could be possible if supportive inflation data emerges by
the September meeting. The Fed's cautious optimism and balanced outlook were well-received
by financial markets. However, the cryptocurrency market saw declines, with BTC and ETH
falling by 2.4% and 1.3%, respectively. Additionally, the BVIV and EVIV (ETH Volmex Implied

Volatility Index) dropped significantly by 13.1% and 10.5%, respectively, as the uncertainty
around the Fed's decisions dissipated.
Economic data released on August 1st and 2nd presented a worrisome picture, indicating acontraction in the manufacturing sector and weaker-than-expected job growth. This news led tosharp declines in cryptocurrency markets and major U.S. stock indices, raising concerns about apotential recession and fueling uncertainty about the Federal Reserve's future policy stance.
The situation worsened on August 5, as Japan's stock market experienced a dramatic decline.
The Nikkei 225 plummeted 12%, marking the largest drop since 1987. This severe downturn,driven by global recession fears, prompted a surge in the yen as investors sought safe-havenassets. The turmoil extended to U.S. markets, resulting in significant losses across major indices,reflecting heightened global economic anxiety and its impact on financial stability.
Cryptocurrency markets reacted swiftly, with BTC and ETH experiencing unprecedented moves.
BTC fell by 7.2%, while ETH dropped by 10.1% by the end of the day. The volatility was further
reflected in the BVIV and EVIV, which surged by 11% and 33%, respectively.

Summary
Global markets experienced sharp declines on August 5, 2024, largely due to growing concerns
about the weakening U.S. economy. Despite the Bank of Japan's interest rate hike on July 31, it
was the subsequent release of disappointing U.S. manufacturing and unemployment data, alongwith signs of weakening corporate earnings, that rattled investors.
As fears of a slowdown in the U.S. economy mounted, markets worldwide reacted, leading tosignificant losses, including a 12% drop in Japan's Nikkei 225, a 3% fall in the S&P 500, andsubstantial declines in major cryptocurrencies like Bitcoin and Ether. This global sell-off
underscores the critical influence of U.S. economic health on financial markets around the world.

Appendix A: Timeline
Wednesday (July 31, 2024) BOJ raised its key interest rate to about 0.25% from a range of zero
to about 0.1%
Wednesday (July 31, 2024) Fed raised kept the target interest rate range same at 5.25%-5.5%
Thursday (August 1, 2024) Initial Jobless claims increased to one-year high of 249K from235K while ISM manufacturing index dropped to 8-month low
Friday (August 2, 2024) The Labor Department reported only 114,000 new jobs, below
expectations, and a rise in the unemployment rate to 4.3%
Monday (August 5, 2024) Global market crash. Nikkei 225 fell 12%, S&P 500 3%

Appendix B: Details
Bank of Japan’s Interest Rate Decision
On July 31, 2024, the Bank of Japan (BOJ) raised its key interest rate to approximately 0.25%,
from a previous range of zero to about 0.1%, to counteract the yen's depreciation and rising
import costs. This move, only the second rate increase in 17 years, reflects a cautious shift fromJapan's long-standing near-zero interest rate policy. The market responded positively, with theNikkei 225 index rising by 1.5% on the day of decision, indicating investor confidence in theBOJ's approach to stabilizing the economy and managing inflationary pressures.

Federal Reserve’s Interest Rate Decision
On July 31, 2024, the Federal Reserve decided to keep short-term interest rates unchanged,
maintaining the target range at 5.25%-5.5%, the highest level in 23 years. While acknowledging
that inflation has eased and is approaching the 2% target, Fed officials emphasized that moreprogress is needed before considering rate cuts. Chair Jerome Powell noted that a reduction
could be possible as soon as the September meeting if data supports further easing in inflation.
The Fed's statement reflected cautious optimism, upgrading language from previous meetingsand highlighting a more balanced outlook on achieving employment and inflation goals. TheU.S. economy has demonstrated resilience with strong GDP growth, though there are signs of asoftening labor market. Markets reacted positively to the potential for future rate cuts, rallying on
Powell's comments.

Weak Economic Data
On August 1, 2024, markets reacted sharply to reports showing that the manufacturing sector hadcontracted, signaling a further slowdown in economic activity. This data contributed to a broader
market sell-off, with the S&P 500 falling 1.4%, the Nasdaq 100 dropping 2.4%, and the Russell
2000 tumbling 3%. The contraction in manufacturing, along with rising unemployment claims,
intensified concerns about the Federal Reserve's policy response. As a result, bond yields fell,with investors anticipating multiple rate cuts by the Fed, while equities faced heightened
volatility amid uncertainty about the future economic outlook.
On August 2, 2024, stocks plunged sharply again, after a disappointing jobs report for July raised
concerns about a potential recession. The S&P 500 fell 1.84% to 5,346.56, the Nasdaq
Composite dropped 2.43% to 16,776.16—entering correction territory with a 10% decline fromits peak—and the Dow Jones Industrial Average decreased 1.51% to 39,737.26. The Labor
Department reported only 114,000 new jobs, below expectations, and a rise in the unemployment
rate to 4.3%. This weak economic data led to a rush into bonds, pushing the 10-year Treasury
yield to its lowest since December, and caused significant losses in tech stocks like Amazon andIntel, while banks also faced heavy selling. The market's reaction underscored growing doubts
about the Federal Reserve's decision to keep rates unchanged earlier in the week.

Global Market Crash
Japan's stock market has faced a dramatic downturn, with the Nikkei 225 index falling 12% on
August 5, 2024, its worst drop since 1987, driven by global fears of an American recession. Thisdecline has pushed the Topix nearly 25% below its recent peak. Concurrently, the yen has surged
13% from its recent lows, indicating a shift towards safe-haven currencies amidst market
turbulence. These sharp movements not only reflect severe domestic financial challenges but
also have the potential to amplify global market volatility due to Japan’s significant economic
influence.
In response, U.S. markets also suffered: the Dow Jones Industrial Average fell by 2.6%, the S&P
500 dropped 3.0%, and the Nasdaq Composite lost 3.4%. The broad sell-off highlights increased
global economic anxiety and its impact on financial markets.

Appendix C: DataS&P 500DateOpenHigh

Low

Close

Aug 5, 2024

5,151.14

5,250.89

5,119.26

5,186.33

Aug 2, 2024

5,376.63

5,383.89

5,302.03

5,346.56

Aug 1, 2024

5,537.84

5,566.16

5,410.42

5,446.68

Jul 31, 2024

5,505.59

5,551.51

5,493.75

5,522.30

Nikkei 225
DateOpen

High

Low

Close

Aug 5, 2024

35,249.36

35,301.18

31,156.12

31,458.42

Aug 2, 2024

37,444.17

37,471.52

35,880.15

35,909.70

Aug 1, 2024

38,781.56

38,781.56

37,737.88

38,126.33

Jul 31, 2024

38,140.77

39,188.37

37,954.38

39,101.82

OpenHigh

Low

Close

VIXDateAug 5, 2024

23.39

65.73

23.39

38.57

Aug 2, 2024

20.52

29.66

20.01

23.39

Aug 1, 2024

16.2

19.48

15.95

18.59

Jul 31, 2024

16.66

16.77

15.71

16.36

BTC
Date

Open

High

Low

Close

Aug 5, 2024

58,141.65

58,224.18

49,687.50

53,977.56

Aug 4, 2024

60,660.21

61,046.91

57,404.44

58,121.62

Aug 3, 2024

61,425.16

62,138.20

59,924.58

60,669.33

Aug 2, 2024

65,322.11

65,507.91

61,248.64

61,420.32

Aug 1, 2024

64,632.69

65,533.64

62,298.53

65,324.88

Jul 31, 2024

66,178.36

66,799.62

64,527.55

64,619.53

OpenHigh

Low

Close

BVIV
Date
Aug 5, 2024

59.65

89.04

58.50

66.20

Aug 4, 2024

54.16

59.90

53.82

59.68

Aug 3, 2024

53.71

55.36

52.17

54.20

Aug 2, 2024

52.16

53.78

49.03

53.72

Aug 1, 2024

50.63

52.78

49.28

52.15

Jul 31, 2024

58.25

59.78

50.33

50.63

ETH
Date

OpenHigh

Low

Close

Aug 5, 2024

2,688.92

2,693.09

2,185.95

2,417.03

Aug 4, 2024

2,900.86

2,930.17

2,660.94

2,686.32

Aug 3, 2024

2,984.17

3,014.07

2,863.89

2,901.58

Aug 2, 2024

3,202.18

3,213.94

2,969.23

2,986.54

Aug 1, 2024

3,232.28

3,240.99

3,080.80

3,202.49

Jul 31, 2024

3,278.32

3,347.48

3,217.21

3,230.94

EVIV
DateOpenHighLow

Close

Aug 5, 2024

59.78

102.33

59.78

79.53

Aug 4, 2024

60.66

62.03

59.41

59.48

Aug 3, 2024

59.41

61.38

59.17

60.64

Aug 2, 2024

56.63

59.38

55.16

59.38

Aug 1, 2024

56.68

56.86

55.38

56.64

Jul 31, 2024

63.34

69.59

56.27

56.69

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