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Japan’s benchmark stock index plummeted 13 per cent, its worst day in 37 years, as global markets were rattled by the prospect of a US recession.
In a rout echoed in other Asian markets, the Nikkei 225 wiped out its gains for the year, the sharpest sell-off since “Black Monday” in October 1987.
In Europe, the benchmark Stoxx Europe 600 shed 3 per cent. Futures markets indicated the momentum was likely to extend to the US. Contracts tracking the Nasdaq 100 were trading down 5 per cent while the S&P 500 was expected to open 2.9 per cent lower.
The declines come amid fears that the Federal Reserve has been too slow to respond to signs the US economy is weakening, and may be forced to play catch up cut with a series of rapid interest rate cuts.
Investor concerns over the health of the world’s biggest economy and the rising tensions between Israel and Iran have piled further pressure on a market already buckling under an investor exodus from high-flying technology stocks.
“I’m not expecting a bounce for a little while, because right now we have this perfect storm of the Japanese carry trade being unwound, weakness in US Big Tech and Middle East tensions,” said Seema Shah, chief global strategist at Principal Asset Management.
Futures on the Vix index of expected US stock market turbulence — commonly known as Wall Street’s “fear gauge” — climbed above 40 points on Monday, the highest since the early stages of the Covid-19 pandemic.
Traders in Tokyo said the selling was part of a big correction and de-risking move by global funds. But Tokyo equities were also hit by a yen that has strengthened by about 12 per cent since mid July. On Monday, the yen soared 2.2 per cent to ¥142.3 against the dollar.
“The Japanese market is seen by global investors as a warrant on global trade,” said the Japan head of one global pension fund. “So if you are in severe de-risking mode, as a lot of investors are at this point because of US recession fears and geopolitics, it makes sense you take profits in a Japanese market that has done very well so far this year.”
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 Korea, similar circuit breakers were triggered for the first time in four years. Traders in Tokyo at three different brokerages said that they knew of several big hedge fund clients that had been ordered to close all their positions as losses mounted.
The sell-off in Japan was echoed across other Asian markets. South Korea’s Kospi benchmark closed down 9.1 per cent while the Australian S&P/ASX finished 3.7 per cent lower. India’s Sensex lost 2.9 per cent.
The global turbulence extended to the crypto market, with the price of bitcoin falling more than 17 per cent to $52,000 on Monday, while the price of ether, another cryptocurrency, has fallen almost 17 per cent to $2,200.
The Fed kept rates on hold when it met last week, but market reaction after the jobs data indicates that investors believe the central bank may have made a mistake in not cutting rates.
JPMorgan economists joined the growing chorus of Wall Street strategists over the weekend calling for the Fed to reduce rates by 0.5 percentage points at its next two meetings.
Srini Ramaswamy, JPMorgan’s managing director of US fixed income research, wrote on Saturday that he had turned “bullish on volatility” given investors’ newfound uncertainty about the path of interest rates and summer illiquidity.
The tech-heavy Nasdaq Composite finished the week 3.4 per cent lower and has declined more than 10 per cent since July’s all-time high. Treasuries rallied, with the yield on the US 10-year hitting its lowest level since December at 3.82 per cent.
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.
Investors are betting the Fed will lower borrowing costs by more than a full percentage point by the end of the year to counter a weakening economy.
“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, Diana Iovanel, senior markets economist at Capital Economics in London, said equity “valuations are still far from pointing to an economic cataclysm”.
She added: “Renewed fears of a US recession have increased the chances of additional rate cuts from the Fed. But we don’t think that the US economy will stand in the way of an equity rally for much longer.”
Additional reporting by Philip Stafford in London and Harriet Clarfelt and Kate Duguid in New York
