Global stock markets tumbled on Monday, with the Japanese index suffering its worst day in 37 years, as investors fretted about a possible US recession and dumped risky assets.
Tokyo’s Topix fell 12.2 per cent, the sharpest sell-off since “Black Monday” in October 1987 and more than erasing its gains for the year.
US stocks followed suit in early trading, before recovering some of their losses only to slump again before the close. The tech-heavy Nasdaq Composite dropped 6.3 per cent at the open, while the S&P 500 tumbled more than 4 per cent.
At the close, despite more market jitters in the final hour, the S&P 500 finished the session with a loss of 3 per cent. It had been down as much as 4.3 per cent during the morning, but had trimmed its decline to about 1.8 per cent by lunchtime.
The blue-chip Dow Jones Industrial Average was 2.6 per cent off. The Nasdaq Composite, which had tumbled 6.3 per cent shortly after the market opened, ended the day 3.4 per cent weaker..
The Vix index of expected US stock market turbulence – commonly known as Wall Street’s “fear gauge” – jumped above 65 points, the highest level since 2020. By midafternoon, it had fallen back to 34.6 – still well above its long-term average of about 20.
The market has suddenly moved “from a warm summer’s day straight into autumn”, said Antonio Cavarero, head of investments at Generali Asset Management.
Markets, which have been rising for most of this year, fell amid fears the Federal Reserve has been too slow to respond to signs the US economy was weakening, and might be forced to play catch-up with a series of rapid interest rate cuts.
Markets now expect four or five quarter-point reductions across the Fed’s final three meetings of the year. Futures prices implied a roughly 25 per cent probability of an emergency rate cut before the central bank’s next scheduled policy announcement 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.”
The global sell-off was exacerbated by the unwinding of the so-called yen carry trade, in which traders had taken advantage of Japan’s low interest rates to borrow in yen and buy risky assets.
The yen has strengthened by about 12 per cent since mid-July, helped by last week’s interest rate rise from the Bank of Japan, including a gain of 1.9 per cent to ¥144.11 against the dollar on Monday.
“The pockets of pain are in those trades that were based on cheap funding in the Japanese yen space and anything in tech,” said Cavarero. “This looks like a healthy, long-overdue market correction,” he added.
The Fed kept rates on hold when it met last week, but weaker than expected US jobs data on Friday led some investors to conclude that the central bank erred in not cutting rates.
“I think interest rates are too high,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. While the economy was still “relatively strong”, the Fed needed to get rates to about 4 per cent “sooner rather than later”, Rieder said.
However, others said a rapid fall in rates was unrealistic and an emergency move could be counterproductive and create panic.
“I think the market has gotten completely ahead of itself in terms of interest rate cuts being priced in at this point,” said John McClain, portfolio manager at Brandywine Global. An intra-meeting cut is “like shouting fire in a crowded theatre”, he said.
Adding to the pressure on markets, on Saturday Warren Buffett’s Berkshire Hathaway disclosed that it had halved its position in Apple in the second quarter, while raising its cash position to a record $277bn and buying Treasuries.
Retail investors were also unnerved on Monday by problems accessing their brokerage accounts at companies such as Fidelity and Charles Schwab.
Traders in Tokyo said Monday’s plunge was sparked by an exodus of global investors from the Japanese market, which had notched up sizeable gains earlier in the year.
“Japan seems to be the epicentre of a lot of movement today,” said Jason Liu, head of Apac equity and derivative strategy at BNP Paribas. “There appears to be a genuine broad-based Japan liquidation by global funds.”
Trading in both Topix and Nikkei futures were suspended during the afternoon session as the selling frenzy continued into the close, hitting “circuit breaker” levels that automatically stop trading. In South Korea, similar circuit breakers were triggered for the first time in four years.
South Korea’s Kospi benchmark fell 8.8 per cent while the Australian S&P/ASX dropped 2.5 per cent. India’s Sensex lost 2.7 per cent.
In Europe, the benchmark Stoxx Europe 600 shed 2.2 per cent. The UK’s FTSE 100 fell 2 per cent. Dublin fared better than most with shares giving up just 1.2 per cent. – Copyright The Financial Times Limited 2024
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