Global markets plummet on prospect of US recession

London/Sydney — Stock markets tumbled on Monday, with Japanese shares at one point exceeding their 1987 “Black Monday” loss, as fears of a US recession sent investors fleeing from risk while wagering that rate cuts would be needed to rescue growth.

The safe-haven yen and Swiss franc surged, as crowded carry trades unravelled, sparking speculation that some investors were unloading profitable trades to get money to cover losses elsewhere. Such was the torrent of selling that circuit breakers were triggered on stock exchanges across Asia.

Japan’s benchmark Nikkei average closed 12.40% lower at 31,458.42, its largest one-day fall since October 1987, while the broader Topix lost 12.48% to 2,220.91.

European shares fell to near six-month lows amid a global sell-off in equities on fears of a slowdown in US economic growth, with only a handful of stocks trading in the green.

The pan-European Stoxx 600 index was down 2.6% at 487.15 points, its lowest since February 13. The Euro Stoxx volatility index jumped 5.7 points to 30.26, its highest since March 2023.

Germany’s DAX, France’s CAC 40, Britain’s FTSE and Spain’s IBEX 35 all fell more than 2%.

Treasury bonds were in demand, with US 10-year yields hitting at one point 3.723%, the lowest since mid-2023.

A worryingly weak July payrolls report on Friday saw markets price in a 78% chance the Federal Reserve will not only cut rates in September, but ease by a full 50 basis points (bps). Futures imply 122bps of cuts in the 5.25%-5.5% funds rate this year, and rates of about 3% by the end of 2025.

“Signs of emerging weakness in the US economy are evident, with negative indicators from hiring, retail sales, and PMI reports,” said Bruno Schneller, managing partner at Erlen Capital Management. Schneller noted, however, that economic data such as GDP and trade remained stable while the prospect of autumn US rate cuts approached.

Analysts at Goldman Sachs also noted the Fed’s ability to re-instil market optimism, estimating a 25% likelihood of a US recession.

Analysts at JPMorgan were more bearish, assigning a 50% probability to a recession.

“Now that the Fed looks to be materially behind the curve, we expect a 50 bps cut at the September meeting, followed by another 50 bps cut in November,” said economist Michael Feroli. “Indeed, a case could be made for an inter-meeting easing, especially if the data soften further.”

Safe harbours

This week has earnings from industrial bellwether Caterpillar and media giant Walt Disney, which will give more insight into the state of the consumer and manufacturing. Also reporting are health-care heavyweights such as weight-loss drugmaker Eli Lilly.

The huge drop in treasury yields had also overshadowed the US dollar’s usual safe-haven appeal and dragged the greenback down 0.5% against a basket of other major currencies.

The dollar fell by as much as 3.28% against the Japanese yen to ¥141.675, while the euro dived 2.65% to ¥155.63. The single currency rose against the dollar to $1.0945. The Swiss franc was a major beneficiary of the rush from risk, with the dollar falling about 1% and hovering at six-month lows of Sf0.85.

“The shift in expected interest rate differentials against the US 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.”

Investors have also increased wagers other major central banks will ease more aggressively, with the European Central Bank now seen cutting by 67bps by Christmas.

In commodity markets, gold lost some of its safe-haven appeal, falling about 1% to $2,419/oz.

Oil prices eased as concerns about global energy demand offset worries about the potential impact to supply from a widening conflict in the Middle East. Brent fell 137c to $75.44 a barrel while US crude lost 193c to $72.07 per barrel.

Reuters