NEW YORK/LONDON,- Global equities suffered significant losses on Monday as Wall Street joined a worldwide stock rout that began in Japan.
Concerns over a potential recession in the United States led to a tumble in the dollar against the yen and a drop in U.S. Treasury yields.
Oil prices also fell during a volatile session, impacted by recession fears. However, these declines were mitigated by worries that escalating Middle East conflicts could disrupt crude supplies.
The CBOE’s volatility index, often referred to as Wall Street’s fear gauge, initially surged 42 points to 65.73, its highest level since the onset of the COVID-19 pandemic in March 2020. It later pared gains, settling at 35.98, up 12.5 points.
Japan’s benchmark Nikkei average closed down 12.40%, marking its largest single-day decline since October 1987. The sell-off on Wall Street was triggered by a weaker-than-expected U.S. payrolls report for July, which increased investor bets for a 50 basis point rate cut by the Federal Reserve in September. This followed disappointing earnings reports from several major technology companies.
“It’s really a confluence of things,” said Eric Wallerstein, chief market strategist at Yardeni Research in Los Angeles. He cited factors such as the unwinding of yen-funded trades, Middle East tensions, disappointing U.S. earnings updates, and a weak jobs report as contributors to the market downturn.
U.S. stocks partially recovered losses after the Institute for Supply Management (ISM) reported that services sector activity rebounded in July, easing recession fears. The ISM’s non-manufacturing purchasing managers’ index (PMI) rose to 51.4 from 48.8 in June, surpassing economist expectations of 51.0. A PMI reading above 50 indicates growth in the services sector, which constitutes more than two-thirds of the U.S. economy.
On Wall Street, the Dow Jones Industrial Average was down 1,090.72 points, or 2.74%, at 38,646.54 at 10:40 a.m. (1440 GMT). The S&P 500 dropped 165.63 points, or 3.10%, to 5,180.93, and the Nasdaq Composite fell 590.17 points, or 3.52%, to 16,185.99. MSCI’s gauge of global stocks fell 26.19 points, or 3.33%, to 761.02, after hitting a low of 756 earlier. Europe’s STOXX 600 index declined by 2.29%.
In the U.S. Treasury market, yields fell to more than one-year lows, and a key part of the yield curve turned positive for the first time in two years, reflecting growing concerns about a potential U.S. recession. The yield on benchmark 10-year notes fell 2.3 basis points to 3.773%, while the 30-year bond yield dropped 3.4 basis points to 4.0772%. The 2-year note yield, which often moves in line with interest rate expectations, rose 0.9 basis points to 3.8811%.
In currency markets, the Japanese yen surged to seven-month highs against the dollar as traders unwound carry trades, interpreting recent U.S. economic data as increasing the likelihood of a U.S. recession and deeper Fed rate cuts. The dollar index, which measures the dollar against a basket of currencies, fell 0.53% to 102.60. The euro rose 0.5% to $1.0962, while the dollar weakened 2.12% against the Japanese yen to 143.44.
In energy markets, U.S. crude oil prices dropped 0.71% to $73 a barrel, and Brent crude fell 0.55% to $76.39 per barrel. In the precious metals market, gold lost some of its safe-haven appeal, with spot gold dropping 1.98% to $2,394.99 an ounce and U.S. gold futures falling 1.51% to $2,389.00 an ounce.