Wall Street joined a global stock rout, with Japanese shares surpassing 1987 “Black Monday” losses, amid U.S. recession fears.
Nasdaq futures dropped over 4%, and S&P 500 futures fell 3%, following a Japan-initiated sell-off affecting European markets.
CBOE’s volatility index, Wall Street’s fear gauge, surged over 30 points to 53.55, its highest since March 31, 2020.
Japan’s Nikkei closed down 12.40% at 31,458.42, the largest drop since 1987; Topix fell 12.48% to 2,220.91.
“There are lots of other big moves in markets, but it’s safe to say they wouldn’t have been nearly as big if it wasn’t August,” said Jim Reid, global head of macro and thematic research, referring to how sparsely traded summer markets may be roiled more readily.
Reid noted the moves were realistic, citing Bank of Japan’s rate hikes, high tech valuations, and a weak U.S. payrolls report.
European shares fell to nearly six-month lows; however, only a few stocks traded in the green.
Meanwhile, the pan-European STOXX 600 index fell roughly 3% to 483.17 points, its lowest level since February 13.
Germany’s DAX, France’s CAC 40, the UK’s FTSE, and Spain’s IBEX 35 all sank more than 2%.
The yen and Swiss franc surged, sparking speculation that investors sold profitable trades to cover losses, triggering circuit breakers in Asia.
Treasury bonds were in demand, with US 10-year rates falling to 3.721%, their lowest level since mid-2023.
Due to a weak July payroll report, markets now see a 78% chance of a 50 basis point Fed rate cut, with 122 basis points expected this year and rates around 3.0% by end-2025.
“Signs of emerging weakness in the U.S. economy are evident, with negative indicators from hiring, retail sales, and PMI reports,” said Bruno Schneller, managing partner at Erlen Capital Management.
However, Schneller noted that while economic data such as GDP and trade stayed stable, autumn U.S. rate cuts approached.
Analysts at Goldman Sachs see a 25% recession chance, while JPMorgan assigns a 50% probability, reflecting differing market outlooks.
“Now that the Fed looks to be materially behind the curve, we expect a 50 bp cut at the September meeting, followed by another 50 bp cut in November,” said economist Michael Feroli.
Market Trends: Economic Data and Currency Shifts
Later Monday, investors will gauge service sector employment from the ISM non-manufacturing survey, with analysts expecting a rebound to 51.0.
This week, Caterpillar and Disney report, offering insights into consumer and manufacturing trends. Additionally, Eli Lilly will update on healthcare.
The large drop in Treasury yields overshadowed the dollar’s safe-haven appeal, dragging it down 0.5% against major currencies.
The dollar fell 3.28% to 141.675 yen but rebounded to 142.675, while the euro dropped 2.3% to 156.20 yen and rose to $1.0952.
The Swiss franc benefited from the risk aversion, as the dollar fell 1%, hitting a six-month low of 0.8500 francs.
“The shift in expected interest rate differentials against the U.S. has outweighed the deterioration in risk sentiment,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.
“If the recession narrative takes hold in earnest, we would expect that to change, and the dollar to rebound as safe-haven demand becomes the dominant driver in currency markets.”
Investors now expect aggressive easing from major central banks; European Central Bank may cut rates by 67 basis points by Christmas.
In commodity markets, gold’s safe haven appeal diminished, dropping approximately 2.3% to $2,387 an ounce.
Oil prices eased; however, global demand concerns outweighed worries about supply impact from the widening Middle East conflict.
Brent fell 123 cents to $75.58 a barrel; meanwhile, U.S. crude dropped 135 cents to $72.15 per barrel.
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