Global stock markets fell sharply on Monday — with the Japanese index suffering its worst day in 37 years — as investors around the world worried over the possibility of a US recession.
The Topix index in Japan fell more than 12%, its biggest decline since October 1987.
On Wall Street, the Nasdaq composite index fell more than 6% in early trade as the S&P 500 lost 4.1%. In London, the FTSE 250 was down about 2.6%.
Markets have fallen amid fears that the US Federal Reserve has been too slow to respond to signs the US economy is weakening, and might be forced to implement a number of rapid interest rate cuts.
Apple shares were down 9%, Tesla was down 11% and Nvidia fell 15%.
The Vix index of expected US stock market turbulence, which is known as the “fear gauge,” jumped above 65 points on Monday, the highest level since 2020.
The stock market declines have been made worse by the unwinding of the yen carry trade — in which investors had taken advantage of Japan’s low interest rates to borrow in yen and buy “risky” assets.
In recent weeks, the yen has strengthened by about 13% amid last week’s interest rate rise from the Bank of Japan.
The Federal Reserve kept rates on hold last week — but market reaction after weaker than expected US jobs data on Friday has indicated to some that investors believed the central bank might have made a mistake in not cutting interest rates.
On Monday, trading in both Topix and Nikkei futures were suspended during the afternoon session. South Korea’s Kospi fell almost 9% while the Australian S&P/ASX declined 2.5%. India’s Sensex fell almost 3%. In Europe, the benchmark Stoxx Europe 600 tumbled 3.1%.
REACTION:
AJ Bell investment director Russ Mould: “There are two ways of looking at the summer stock market stumble. Bulls will see it as a hiatus and no more during the traditionally stale period where major players sell in May and go away, returning on St. Leger Day in September, while bears will argue this is the start of a long overdue reckoning for markets where buybacks, borrowing on margin (or in yen) and central bank largesse are providing liquidity to overvalued, overhyped risk-on assets.
“The fight is on. Bulls will note without undue concern that the aggregate stock market valuation of the Magnificent Seven is only back to where it was in June and the NASDAQ is at levels seen as recently as late May. Bears will say that someone, somewhere has lost $2.3 trillion on the Mag7 since May, while the NASDAQ is just 5% above where it was in November 2021, before the AI hype machine moved into top gear.
“Either way, a lot of froth has been blown off the top and some will see this as a healthy (if apparently unexpected) correction, others as the start of something altogether nastier.
“The slide that started in July does leave the NASDAQ not much higher than late 2021, which may be an unpleasant surprise to many investors, especially if they are using index-trackers and exchange-traded funds to glean their stock market exposure. These passive instruments will have followed the technology-laden American index straight up and now straight down into correction territory as the NASDAQ is more than 10% off its high.
“The combined valuation of the Mag7 is still $14.7 trillion, down from July’s $17 trillion peak. That is a quick-fire 15% slide, and it will be interesting to see if it tests the resolution of bulls of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
“True believers are likely to see it as little more than the usual market rough and tumble. Those whose guiding light is valuation may be wondering whether this is the start of a major correction to match the one seen in 2022-23 (when interest rates started to rise), given the vertiginous rise in the seven names’ total price tag and the fact that they still represent nearly 33% of the S&P 500’s total valuation.
“Prior examples of markets that rely so heavily on so few names are relatively scarce and while the party on the way up in the so-called ‘go-go’ years of the late 1960s (when US tech stocks dominated), the early 1970s (the Nifty Fifty) and the late 1990s (tech stocks again) was great, the hangover on the way down was truly awful.
“In this context, it is intriguing to see how just two of the Magnificent Seven are now in the top fifty in the S&P 500 this year in terms of their share price performance, so perhaps their valuations are starting to weigh heavily – although supporters will cast that aside by saying six of the seven are still offering healthy gains and that Nvidia is still the best performer of all this year so far.
“Any fears of a lop-sided US equity market could yet spill over globally, though. The S&P 500 represents 61% of the combined market valuation of the FTSE All-World index’s 3,700-odd members. The last time the US represented such a big chunk of global market value was 2000, right at the peak of the technology, media and telecoms bubble – and that burst shortly afterwards.”
Derren Nathan, head of equity research, Hargreaves Lansdown: “The FTSE 100 has opened down as the US sneeze risks becoming a cold. Asia Pacific equities continued on Monday where indices to the west finished last week.
“Japanese stocks gave up most of the last year’s gains with the Topix and Nikkei plunging over 7%, closing more than 20% below last month’s record highs.
“Exporters bore the brunt of the sell-off as contagion from last week’s poor employment and manufacturing data in the States put recessionary fears back on the table. The discussion around September’s rate decision at the Federal Reserve Bank has moved from if to how much, with the odds now moving in favour of a half point cut.
“Far Eastern economies remain in focus this week, with the Reserve Bank of Australia due to announce its rate decision tomorrow. It’s certainly a more complex conundrum than it would have been a week ago.
“Any sign of a slowdown in the global flow of goods and services from Chinese trade numbers could keep markets in skittish form. But there has been a little reassurance today from better-than-expected services activity numbers in China. The Caixin/S&P Global services purchasing managers’ index (PMI) rose for the 19th month in a row to 52.1 in July, albeit at a slower pace than in recent months.
“US futures suggest markets may fall further before finding a support level. The coming months will be a testing time with economic and political uncertainty weighing on the market, as the US heads towards an increasingly unpredictable election.
“Today will see a read on business confidence from various corners of the globe with PMI data due from the UK, the US, Germany and the wider European Union.
“Trying to catch a falling knife can end in tears, but its important not to abandon a long-term lens. Time in the market and diversification have been consistently shown to be the bedrock of successful investing strategies. Current conditions will present opportunities to buy shares in quality companies.
“To mitigate the volatility, it makes sense to feed excess capital into the market slowly, but established companies with dominant market positions have survived and prospered through many cycles. And emerging mega-trends such as artificial intelligence and the potentially enormous healthcare impact of weight-loss drugs haven’t gone away.
“But even the most seasoned of investors keep their powder dry sometimes. Warren Buffet’s Berkshire Hathaway sold $76bn of stocks in the second quarter, leaving $277bn of cash on the balance sheet, equivalent to over 60% of London’s FTSE-250 index.
“Apple’s sales and profit growth was solid, if not spectacular, in the third quarter. The key to unlocking further upside is convincing the company’s fanatical customer base that its entry into the AI race is reason enough to upgrade perfectly good older iPhones.
“The AI landscape is changing at a supersonic pace. Rumours have surfaced that NVIDIA’s latest super-chip the Blackwell B200 may see its launch delayed for three months.
“The stock’s already down nearly 15% this month, and investors will be paying attention to guidance for the next quarter when it reports Q2 numbers later this month. But demand for AI chips is rampant and supply is tight.
“Even with its existing models NVIDIA can out compete on both power and the ability to fulfil orders. Forecasts that full-year revenue will nearly double to over an eye-watering $120bn for the full year, are unlikely to be derailed much, if at all.
“After economic concerns in the US drove the biggest weekly fall since April, Brent Crude prices have fallen further today and now sit just above $76 per barrel.”
Michael Langham, economist at Abrdn: “US recession fears are back as a dominant theme, driven by a combination of a rapid loss of momentum in the labour market and reports of soft consumer demand in earnings reports.
“Market pricing is now indicating a belief that the Fed is behind the curve and will cut rapidly in upcoming meetings to avoid a hard landing. This has all spilled into Asian markets, with carry trades unwinding and risk-off sentiment prevalent.
“However, we think the macro backdrop isn’t as terminal as markets are indicating. Strong labour supply growth in recent years has helped to cool the labour market and layoffs remain low in the US.
“In Asia, the upturn in tech exports and still buoyant domestic demand shouldn’t set alarm bells ringing yet for policymakers.
“We expect the Fed to begin easing in September, which should provide the runway for cutting cycles in parts of emerging Asia, and likely further stimulus in China could also have some positive spillovers, softening any slowdown in the region.”
Lindsay James, investment strategist at Quilter Investors: “The market rout in Japan overnight, which saw the Nikkei 225 index fall more than 12 per cent, looks to be a precursor to more volatility in US and European markets this week.
“Concerns have risen that the US economy is seeing a rising risk of recession at the same time as the Bank of Japan has begun to raise rates, effectively stymying the popular carry trade which saw investors borrowing cheaply in yen to invest overseas.
“Ultimately this period of outsized volatility against what remains a reasonably solid economic backdrop should present a buying opportunity for long-term investors.
“Current market moves in the US and Europe are well within the bounds of normal market volatility, particularly given that high concentration in US markets saw the Magnificent Seven stocks dominating US equity market performance for much of the first half of the year.
“Despite a generally positive second quarter earnings season, with more than three-quarters of companies reporting better-than-expected profitability, high-profile disappointments from companies like Microsoft and Amazon have caused significant drops in the index.
“The MSCI USA Equal Weighted Index, which weights each stock equally, remained flat in sterling terms for the month up to 2nd August. In contrast, the MSCI USA Index declined by 3.92% over the same period. This indicates that recent declines have been more concentrated among the Magnificent Seven stocks, as other companies, with more reasonable valuations and less ambitious earnings expectations, have been less affected.
“Economic data has also been taken badly at a time when sentiment has already been more sensitive to bad news. Data out last week showing weak employment payrolls in the US and a rise in unemployment to 4.3% in July challenged investors’ expectations of soft landing, which had become a high conviction view across the market.
“With the Federal Reserve also holding off on a first rate cut, but signalling that inflation looked to be on track to allow for an initial move in September, investors were concerned that cuts would come too late, with the Bank of England and ECB having already made the first move down.
“This seems a stretch given the fundamental health of the US economy. Growth in the second quarter was a respectable 2.8% on an annualised basis, with labour productivity growing 2.3%, which ultimately raises the potential for US growth in years to come but with welcome downward pressure on prices.
“That said, there is a clear slowing in the US economy as we move into the second half of the year, indicated by the raft of companies reporting weaker consumer trends particularly in lower income groups, as high interest rates continue to act as a headwind. This does, however, fall well short of a recession, with the GDPNow indicator published by the Atlanta Fed forecasting 2.5% growth in the third quarter, as a seasonally adjusted annual rate.
“Whilst recent data has done little to calm investors nerves, we are at point in the economic cycle where central banks have maximum firepower to stimulate growth and are entering a phase where we would expect this to be gradually deployed to good effect.
“Inflation trends are improving, with a slower economy likely to support that, whilst the phenomenon of the highly valued Magnificent Seven stocks is now being rightly tested and ultimately likely to lead to a broadening of market returns.
“As we move towards a first rate cut in the US at a time of geopolitical uncertainty and deep social division, volatility could well be persistent. However, for long-term investors, this can be a great time to take advantage of a better entry point with globally diversified, multi-asset portfolios well equipped for this backdrop.”
Richard Hunter, Head of Markets at Interactive Investor: “US markets endured another bruising session as a feeble jobs report escalated recessionary fears, resulting in moments of mayhem elsewhere.
“The non-farm payrolls report showed that just 114000 jobs had been added in July, against estimates of 185000 and sharply lower than the 179000 figure for June, which itself was revised down from an initial print of 206000. At the same time the unemployment rate, which had been expected to remain stable at 4.1%, increased to 4.3%.
“The reading followed weak jobless claims and manufacturing data from the previous day which had taken investors by surprise. The main concern now is whether the Federal Reserve’s reluctance to reduce interest rates thus far is now translating into a policy error which will see the economy glide into recession.
“At the same time, speculation is now rife that a 0.5% rate cut is now firmly on the cards, with the vague possibility that it could come by way of an emergency announcement prior to the September meeting.
“The fallout was plain to see, with a flight towards bonds and haven assets and with each of the main indices registering declines.
“The latest fall of around 2.5% for the Nasdaq puts that market into correction territory, with the index now having fallen by more than 10% from its recent record high. In addition, recessionary fears extended to the banking sector, with the likes of Bank of America and Wells Fargo sliding by 5% and 6.4% respectively.
“The moves also place perhaps more importance than usual on the services sector ISM, which is due later today, in particular to see whether the weakness of the manufacturing print from last week will be repeated. In addition, the company earnings season continues with updates from the likes of Caterpillar and Walt Disney, which should shed further light on the manufacturing and consumer areas.
“Thus far, there have been some unpleasant surprises particularly in the mega cap technology sector, with Amazon being the latest casualty with a fall of almost 9% after its update disappointed investors following weaker than expected revenues and cautious guidance.
“On the other hand, and notwithstanding any further shocks, to have let some air out of the tyres after a recent breathless run is usually seen as a healthy corrective measure. There are few reasons at this precise moment to signal an end to the bull market, even if investor sentiment is understandably cautious. In the year to date, the main indices have still produced a decent return, with the Dow Jones now up by 5.4%, the S&P500 by 12% and the Nasdaq by 11.8% even after drifting into correction territory.
“In Asia, the declines were even more pronounced, with Japan’s Nikkei index plunging by as much as 13% to eradicate the entirety of its recent progress, which had included moving to record highs. Indeed, the index is now down by over 4% from a year ago, with the weakness of the yen and the central bank’s move to increase interest rates weighing on sentiment and adding to the inevitable weakness being experienced across the technology sector throughout the region.
“Of little surprise was the torrid opening which UK markets encountered following these global waves of unease. Half-hearted moves into defensive stocks provided brief respite for the likes of Unilever, Reckitt Benckiser and GlaxoSmithKline, but overall the markdown was widespread.
“Stocks with a particular exposure to the US such as Pershing Square and Scottish Mortgage topped the loser board with losses of over 8% and 7% respectively, while the banks also suffered, with the likes of Barclays and NatWest declining by 5% in something of a read across from the Wall Street experience.
“The FTSE250 also felt the selling pressure, reducing its gains in the year to date to just 2.6%, while the FTSE100 is now ahead by 3.7% with the recent testing of record highs now slipping away into more distant memory.
“It remains to be seen whether these reactions are overdone, as can often be the case until the negative momentum subsides, and whether there is also something of a buying opportunity emerging given that markets are prone to exaggeration in both directions on the back of a marked change of sentiment.”