SYDNEY/LONDON, — Stock markets experienced significant declines on Monday, with Japanese shares suffering losses surpassing those of the 1987 “Black Monday” crash.
Investor concerns over a potential U.S. recession led to a mass exodus from riskier assets, while speculation grew that interest rate cuts would be necessary to sustain economic growth.
The Japanese yen and Swiss franc surged as investors unwound crowded carry trades, triggering speculation that some were liquidating profitable positions to cover losses elsewhere. The wave of selling was so intense that circuit breakers were activated on stock exchanges throughout Asia.
Japan’s benchmark Nikkei average plummeted 12.40% to close at 31,458.42, marking its most significant one-day drop since October 1987. Similarly, the broader Topix index fell 12.48% to 2,220.91. European stocks opened with notable declines: France’s CAC 40 dropped 2.1%, Spain’s IBEX fell 2.8%, and the UK’s FTSE 100 decreased by 1.7%, all driven by fears of a global recession following weak U.S. economic data.
Demand for Treasury bonds surged, pushing U.S. 10-year yields to 3.723%, the lowest since mid-2023, before they slightly rebounded to 3.737%.
A weak July payrolls report on Friday led markets to price in a 78% chance that the Federal Reserve will cut rates in September, potentially by a full 50 basis points. Futures suggest a total of 122 basis points of cuts in the current 5.25-5.5% funds rate this year, with rates possibly dropping to around 3.0% by the end of 2025.
“We have increased our 12-month recession odds by 10 percentage points to 25%,” noted analysts at Goldman Sachs in a statement. They believe the risk is mitigated by the Fed’s capacity to ease policy. Goldman Sachs now anticipates 25 basis point cuts in September, November, and December. “If the August employment report is as weak as the July report, then a 50 basis point cut would be likely in September,” they added.
JPMorgan analysts were even more pessimistic, assigning a 50% probability to a U.S. recession. “Given the Fed’s lag in response, we expect a 50 basis point cut in September, followed by another in November,” said economist Michael Feroli. He suggested that an inter-meeting easing could occur if economic data further deteriorates, although Fed officials might worry about potential misinterpretations of such a move.
Seeking Safe Havens
Investors are closely watching the ISM non-manufacturing survey later on Monday, expecting a rebound to 51.0 after June’s unexpected drop to 48.8. This week’s earnings reports from industrial bellwether Caterpillar and media giant Walt Disney will provide further insight into the state of the consumer and manufacturing sectors. Additionally, healthcare companies, including weight-loss drugmaker Eli Lilly, will be reporting.
The sharp decline in Treasury yields overshadowed the U.S. dollar’s usual safe-haven appeal, causing the greenback to fall 0.4% against a basket of major currencies. The dollar dropped as much as 3.28% against the Japanese yen to 141.675, while the euro fell 2.12% to 156.46. The euro rose against the dollar to $1.0929. The Swiss franc benefited from the risk-off sentiment, with the dollar falling 1.07% to hover at six-month lows of 0.8485 francs.
“The shift in expected interest rate differentials against the U.S. has outweighed the deterioration in risk sentiment,” said Jonas Goltermann, deputy chief markets economist at Capital Economics. “If the recession narrative takes hold in earnest, we would expect that to change, and the dollar to rebound as safe-haven demand becomes the dominant driver in currency markets.”
Commodities
In commodity markets, gold’s appeal as a safe haven diminished, dropping 0.5% to $2,431 an ounce. Oil prices also eased due to concerns about global energy demand outweighing worries about supply disruptions from escalating conflicts in the Middle East. Brent crude fell 64 cents to $76.17 a barrel, while U.S. crude lost 65 cents to $72.87 per barrel.
Source: Reuters