On Monday, global markets faced a severe downturn as fears of a recession in the United States intensified following a weak jobs report last Friday. The sell-off, which began last week, accelerated dramatically, causing significant declines in stock prices, cryptocurrencies, and commodities.
Ten-year U.S. Treasury yields briefly surpassed those on two-year Treasuries for the first time since July 2022, as traders anticipated that the Federal Reserve might soon cut interest rates. This inversion is often seen as a predictor of a recession. Consequently, U.S. stocks plummeted at the market’s opening.
Futures on the Vix index of expected US stock market turbulence — commonly known as Wall Street’s ‘fear gauge’ — jumped above 60 points on Monday, the highest level since the early stages of the Covid-19 pandemic
Asian Markets Lead Decline
The sharpest declines were observed in Japanese and other Asian markets. Cryptocurrencies, oil, and European equities also followed suit. U.S. equity futures fell significantly, with Wall Street’s VIX index, known as the ‘fear gauge,’ reaching its highest level in nearly four years.
The Japanese market saw a historic drop, with the Topix index falling 12.2 percent, marking its worst day since “Black Monday” in October 1987. The sell-off erased all gains made earlier this year. In the U.S., the Nasdaq Composite index dropped by 3.7 percent, while the S&P 500 fell by 3.1 percent. Major tech stocks were particularly hard hit, with Nvidia down 6.5 percent, Apple down 4.9 percent, and Tesla dropping 4.8 percent.
European Markets and Corporate Warnings
In Europe, the Stoxx Europe 600 index fell by 2.3 percent. German chipmaker Infineon warned of weak demand and falling margins, further contributing to the market’s negative sentiment. Additionally, Dubai-based Sidara canceled a bid for the engineering company John Wood Group, citing the volatile market conditions.
Federal Reserve and Market Expectations
Market analysts expressed concerns that the Federal Reserve might have been too slow to react to signs of weakening in the U.S. economy and might now need to implement rapid interest rate cuts to catch up. The market now anticipates a series of rate cuts totaling 1.25 percentage points across the Fed’s final three meetings of the year, with a roughly 25 percent chance of an emergency rate cut before the next policy meeting in September.
“This is a market tantrum,” said Priya Misra, a portfolio manager at JPMorgan. “I think the market will continue to panic until the Fed shows signs of moving.” However, Misra added that while the Fed should cut rates quickly, the data does not yet justify calls for a recession.
Impact of Yen Carry Trade
The sell-off was exacerbated by the unwinding of the yen carry trade, where traders borrow in yen at low interest rates to invest in higher-yielding assets. The yen has strengthened by about 13 percent since mid-July, buoyed by an interest rate rise from the Bank of Japan last week. On Monday, the yen gained 2.2 percent to ¥143.43 against the dollar.
Antonio Cavarero, head of investments at Generali Asset Management, noted the pain points in trades based on cheap funding in the Japanese yen space and tech sectors. “This looks like a healthy, long-overdue market correction,” he added.
Cryptocurrency Market and Other Global Markets
The cryptocurrency market also faced significant losses, with Bitcoin falling 14 percent to $53,789 and Ethereum dropping 21 percent to $2,390.
In South Korea, trading was halted as circuit breakers were triggered for the first time in four years, with the Kospi benchmark falling 8.8 percent. Australia’s S&P/ASX dropped by 2.5 percent, and India’s Sensex lost 2.7 percent.
Investor Reactions and Outlook
Adding to market pressures, Warren Buffett’s Berkshire Hathaway disclosed it had halved its position in Apple during the second quarter, while raising its cash position to a record $277 billion and buying Treasuries. On Monday, users of major U.S. brokerages reported difficulties accessing their accounts during the market open, indicating widespread panic and trading disruptions.
Despite these challenges, some positive data helped pare early losses. U.S. ISM services sector data came in slightly above expectations, providing a glimmer of hope amid the turmoil.
The market’s volatility underscores the uncertainty and fragility of the current economic environment, with investors and analysts closely watching the Federal Reserve’s next moves. As global tensions and economic indicators fluctuate, the need for cautious and strategic financial planning remains paramount.
