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Global investors are bracing for fresh volatility after suffering losses last week, as anxiety over the health of the US economy sweeps markets. Stocks have tumbled in Tokyo again today, where Japan’s Nikkei 225 share index appears to have fallen by 12.8%! The worst one-day drop since the 1987 crash, putting the Nikkei into bear-market territory.
Other Asia-Pacific markets are also falling, with South Korea’s Kospi down over 8% in afternoon trading, and Australia’s S&P/ASX 200 down 3.5%. Further losses are expected in Europe and on Wall Street today.
Appetite for taking risks has waned, after the tech-focused Nasdaq sunk into contraction territory on Friday – closing 10% below its all-time high. Disappointing US jobs data on Friday added to concerns that the Federal Reserve may have blundered by not cutting rates last week, and might be too late to prevent a recession.
The chance of a large reduction in borrowing costs next week has surged. Last week’s selloff came amid a flurry of key events, including:
• the Bank of Japan surprisingly raising rates, prompting the yen to surge
• a weak US ISM manufacturing report, which showed factory activity contracting last month
• a jump in Americans filing for unemployment benefits, to an 11-month high, followed by….…
• a drop in job creation, according to July’s non-farm payroll
• and underwhelming results from major tech firms, which didn’t persuade Wall Street that huge investments in artificial intelligence were paying off.
The news that Warren Buffett had cut his stake in Apple may weigh on tech stocks again this week.
Rising tensions in the Middle East hit stock markets yesterday, too, as fears grew of a retaliatory Iranian attack on Israel. Saudi Arabia’s benchmark index fell by 2.4% on Sunday, and Egypt’s blue-chip index lost 2.9%.
There’s certainly plenty of fear in the system, as illustrated by Wall Street’s “fear gauge” – the Vix index of expected US stock market turbulence – which jumped last week.
As Stephen Innes, managing partner at SPI Asset Management, puts it: "It’s a bit like watching a slow-motion replay of a spill in a crowded market: you know there’s room for more chaos, but you’re just not sure how much more the aisles can take before everything’s on the floor. How did the financial snowball start barreling downhill? It kicked off with the Yen bulking up – a move we hinted at positioning for just before the Bank of Japan (BOJ) decided to hike.
"This beefier Yen set off a domino effect, triggering a global unwinding of carry trades that nudged the Vix into action. Ah, the Vix, our merciless watchdog, always ready to sound the alarm. From there, the market turmoil morphed into a full-on avalanche, propelled by not one but two vector bear assaults. And if you throw in the dismal hi-tech earnings misses into the mix … well, that’s strike three. Each factor compounded the others, turning a manageable slide into a frenzied tumble down the financial slopes."
Cryptocurrencies are also caught up in the selloff. Bitcoin has tumbled by 15% since Friday night, dropping from about $62,500 to $52,800 this morning. Ether, used on the Ethereum network, has lost over 20%.
But Goldman Sachs economists reckon that although there’s an increased risk of a US recession it "continues to see recession risk as limited". Goldman argues that the Federal Reserve has plenty of room to cut US interest rates if needed.
Today we will get a flurry of data from the services sector, which will show how the UK, eurozone and US economies are faring.
The agenda
• 7am BST: Russia’s service sector PMI for July
• 9am BST: Eurozone service sector PMI for July
• 9.30am BST: UK service sector PMI for July
• 3pm BST: US service sector PMI for JulyShare
We’ll be tracking all the main events throughout the day ... |
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