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Global stock markets tumbled on Monday, with the Japanese index suffering its worst day in 37 years, as investors fretted over the possibility of a US recession and dumped risky assets.
The Topix fell 12.2 per cent, the sharpest sell-off since “Black Monday” in October 1987 and more than erasing its gains for the year. On Wall Street, the tech-heavy Nasdaq composite index tumbled 6.3 per cent in early trade, putting it on course for its worst day since the early stages of the Covid-19 pandemic, while the S&P 500 lost 4.1 per cent.
Nvidia fell 15 per cent, while Apple shares were down 9 per cent and Tesla 11 per cent.
The Vix index of expected US stock market turbulence — commonly known as Wall Street’s “fear gauge” — jumped above 65 points on Monday, the highest level since 2020.
The market has suddenly moved “from a warm, summer’s day straight into autumn”, said Antonio Cavarero, head of investments at Generali Asset Management.
Markets, which have been rising for most of this year, fell amid fears the Federal Reserve has been too slow to respond to signs the US economy was weakening, and might be forced to play catch-up with a series of rapid interest rate cuts. These could possibly begin with an emergency move before the next policy meeting in September, analysts said.
Markets now expect 1.25 percentage points of cuts — five quarter-point reductions — across the Fed’s final three meetings of the year. Futures prices implied a roughly 25 per cent probability of am emergency rate cut before the central bank’s next policy announcement in September.
The global sell-off was exacerbated by the unwinding of the so-called yen carry trade, in which traders had taken advantage of Japan’s low interest rates to borrow in yen and buy risky assets.
The yen has strengthened by about 13 per cent since mid-July, helped by last week’s interest rate rise from the Bank of Japan, including a gain of 2.9 per cent to ¥142.31 against the dollar on Monday.
“The pockets of pain are in those trades that were based on cheap funding in the Japanese yen space and anything in tech,” said Cavarero. “This looks like a healthy, long-overdue market correction,” he added.
The Fed kept rates on hold when it met last week, but market reaction after weaker than expected US jobs data on Friday indicated that investors believed the central bank might have made a mistake in not cutting rates.
“I think interest rates are too high,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. While the economy was still “relatively strong”, the Fed needed to get rates to about 4 per cent “sooner rather than later”, Rieder said.
Adding to the pressure on markets, on Saturday Warren Buffett’s Berkshire Hathaway disclosed that it had halved its position in Apple in the second quarter, while raising its cash position to a record $277bn and buying Treasuries.
Traders in Tokyo said Monday’s plunge was sparked by an exodus of global investors from the Japanese market, which had notched up sizeable gains earlier in the year.
“Japan seems to be the epicentre of a lot of movement today,” said Jason Liu, head of Apac equity and derivative strategy at BNP Paribas. “There appears to be a genuine broad-based Japan liquidation by global funds.”
Trading in both Topix and Nikkei futures were suspended during the afternoon session as the selling frenzy continued into the close, hitting “circuit breaker” levels that automatically stop trading. In South Korea, similar circuit breakers were triggered for the first time in four years.
South Korea’s Kospi benchmark fell 8.8 per cent while the Australian S&P/ASX dropped 2.5 per cent. India’s Sensex lost 2.7 per cent.
In Europe, the benchmark Stoxx Europe 600 shed 3.1 per cent.
The global turbulence extended to the cryptocurrency market, with the price of bitcoin falling 20 per cent to $49,812, while the price of ether, another cryptocurrency, dropped 27 per cent to $2,186.
Additional reporting by Philip Stafford in London, and Harriet Clarfelt and Kate Duguid in New York