On Monday, substantial drops were recorded in worldwide stock markets, with the Japanese index having its worst performance in nearly 4 decades, as the fear of a potential US recession and the resultant selling of shaky assets by investors lingered. The Topix in Tokyo plunged by 12.2%, marking the steepest plunge since the infamous “Black Monday” of October 1987, thereby nullifying all of its annual gains. US stocks mirrored this downward trend in the initial trading phase, only for them to partially recover some of their decline, then dip once again prior to the market closing. The Nasdaq Composite, known for its tech-centred nature, saw a decline of 6.3% at start, with the S&P 500 also falling by over 4%.
At the end of trading, even with additional market uncertainties in the last hour, the S&P 500 ended the day with a 3% loss. It had seen a slump of up to 4.3% in the morning, which it managed to reduce to roughly 1.8% come noon. The Dow Jones Industrial Average, classified under blue-chip stocks, was down by 2.6%. Despite the Nasdaq Composite opening with a 6.3% fall, it concluded the day 3.4% weaker.
Wall Street’s famous “fear gauge”, the Vix index, which predicts expected turbulence in the US stock market, soared to over 65 points, the greatest since 2020. By the afternoon, it had decreased to 34.6, though still significantly higher than the average long-term figure of about 20.
Antonio Cavarero, the investments head at Generali Asset Management, stated the market abruptly transitioned from a summer’s day to an autumnal landscape. Amid concerns that the Federal Reserve was running late in responding to indications of an ailing US economy, markets, which had largely been soaring this year, witnessed a downturn. This prompted speculation of the central bank resorting to a slew of speedy interest rate cuts.
Market forecasts now anticipate four or five quarter-point cuts during the Fed’s final three meetings of the year. Initial futures prices depicted a roughly 25% chance of an emergency rate cut ahead of the Fed’s next planned policy announcement in September.
In the opinion of Priya Misra, a portfolio manager at JPMorgan, the situation constituted a “market hysteria”. She added that she believed the panic in the market would persist until the Fed gave signs of action.
In a widespread clearance sale, the impact was intensified by the termination of what is commonly known as the yen carry trade. Traders utilised this strategy to exploit Japan’s extraordinarily low-interest rates, borrowing in yen to acquire high-risk assets. The yen has gained significant strength since mid-July, buoyed around 12 per cent, owing to last week’s interest rate increment by the Bank of Japan. It recorded a surge of 1.9 per cent against the dollar, reaching ¥144.11 on Monday. Cavarero highlighted that the trading practices focused on inexpensive funding in the Japanese Yen sphere and technology related areas are enduring the brunt. He suggested that this resembles a well-deserved, much-needed market adjustment.
Despite the US Federal Reserve withholding rate adjustments in the prior week, the weaker than predicted job statistics from the US led certain investors to believe that the bank should have reduced rates. BlackRock’s global fixed income chief investment officer, Rick Rieder, commented that interest rates appear excessively high. With a relatively robust economy, he argues for rates to reach around 4 per cent as a priority. Conversely, others indicated that quick rate reduction lacks feasibility, suggesting that an unplanned move could have adverse effects, potentially triggering alarm.
John McClain, a portfolio manager for Brandywine Global, underscores that the market is presently hyper-optimistic about potential interest rate reductions. He likens a mid-session cut to shouting fire in a packed theatre. Compounding these market pressures, Berkshire Hathaway, owned by Warren Buffett, made known on Saturday its decision to reduce by half its stake in Apple during Q2. In conjunction, it augmented its cash position to an unprecedented $277bn and purchased US government bonds.
Moreover, retail investors experienced distress on Monday when they encountered issues accessing brokerage accounts with firms such as Fidelity and Charles Schwab. According to traders in Tokyo, the Monday market drop resulted from a mass exodus of global investors from the Japanese market, reversing substantial profits made during the earlier part of the year. Jason Liu, who heads Apac equity and derivative strategy at BNP Paribas, noted Japan to be at the centre of significant financial activity and indicated a sincere, widespread liquidation of Japanese assets by global funds.
In the afternoon trading, both Topix and Nikkei futures were paused due to the ongoing sell-off that led to the activation of ‘circuit breaker’ levels which automatically cease trading. The same mechanism was initiated in South Korea for the first time in four years amidst a similar scenario.
The Kospi benchmark in South Korea tumbled by 8.8 per cent, and the Australian S&P/ASX declined by 2.5 per cent. In India, the Sensex plunged by 2.7 per cent.
Across Europe, the Stoxx Europe 600 reference slid by 2.2 per cent. Meanwhile, the FTSE100 in the UK stumbled by 2 per cent. Amongst these, Dublin maintained a better stance, with shares cutting back only by 1.2 per cent. – The Financial Times Limited 2024 copyrights reserved.