On Monday, August 5th, the stock market crashed, with the Japanese stock market plummeting 13%, as concerns over a possible US recession caused investors to withdraw from risk assets and bet on the need for quick interest rate cuts to save economic growth.
Safe-haven assets such as the yen and Swiss franc skyrocketed, arbitrage trades were unwound, and it was speculated that some investors had to sell profitable trades to raise funds to cover losses elsewhere. A large amount of selling triggered multiple circuit breakers at Asian exchanges.
The Nikkei 225 index in Japan fell 13%, hitting a seven-month low, and the drop was the largest since the global financial crisis in 2011. Stock indexes outside of Japan in the Asia-Pacific region fell 4.2%. China's blue-chip stocks fell only 0.5%, thanks to the rebound of the Caixin services PMI to 52.1. #Decision Analysis#
Nasdaq futures fell 4.7%, S&P 500 futures fell 12.4%, and global markets entered panic mode. Euro Stoxx 50 futures fell 2.1%, and FTSE futures fell 1.2%.
The yield on Japan's 10-year government bonds plunged 17 basis points to 0.785%, the lowest level since April, as the market reconsiders the prospect of the Bank of Japan raising interest rates again. Demand for US bonds is strong and the yield on the 10-year Treasury note hit 3.723%, the lowest since mid-2023. The yield on the two-year Treasury note fell to 3.807%, having fallen 50 basis points last week, and may soon be lower than the 10-year Treasury note yield, forming an inverted yield curve that has historically signaled a recession.
Worrying July employment reports led the market to expect that the Federal Reserve would not only cut interest rates in September, but also cut them by 50 basis points. Futures suggest that the benchmark interest rate will be cut by 122 basis points this year to between 5.25-5.5%, and will drop to about 3.0% by the end of 2025.
Goldman Sachs analysts said in a report: "We have increased the probability of a recession in the next 12 months by 10 percentage points to 25%, although the Fed's significant policy space limits the risk."
Goldman now expects rate cuts of 25 basis points in September, November and December. Analysts added: "Our forecast is based on the assumption that August employment growth will rebound and the FOMC will believe that cutting interest rates by 25 basis points is sufficient to address any downside risks. If we are wrong and the August employment report is as weak as July's, the likelihood of a 50 basis point rate cut in September is high."
JPMorgan analysts are more pessimistic, putting the probability of a US recession at 50%. Economist Michael Feroli said:"Now the Fed is clearly behind the curve, and we expect a 50 basis-point rate cut in September and another 50 basis-point cut in November. Especially if the data deteriorates further, Fed officials may be concerned about the interpretation of such measures."
Investors will learn about the employment situation in the service sector from the US ISM non-manufacturing survey released on Monday. Analysts hope the index will rebound to 51.0. Industrial bellwether Caterpillar and media giant Disney's financial reports this week will provide more insight into consumer and manufacturing conditions. Pharmaceutical giant Eli Lilly's financial report will also be released.
The sharp drop in US bond yields has also weakened the dollar's safe-haven appeal, causing it to fall 0.4% against a basket of major currencies. The dollar fell another 2.2% against the yen, to 143.10, and the euro fell 1.9% against the yen, to 156.35. The euro against the dollar remained at 1.0934. The Swiss franc was supported by safe-haven demand, and the dollar fell 0.9% against the franc, hitting a six-month low of 0.8485.
Jonas Goltermann, deputy chief economist at Capital Economics, said:"The change in expectations for the US interest rate differential has outweighed the deterioration in risk sentiment. If recession expectations really take hold, we expect the situation to change and the dollar will rebound as a safe-haven currency dominates the currency market."
Investors have also increased their bets that other major central banks will follow the more aggressive easing of the Federal Reserve, with expectations that the European Central Bank will cut interest rates by 67 basis points before Christmas.
In the commodity market, gold rose to around $2,455 due to safe-haven demand. Concerns about escalating Middle East conflicts drove up oil prices at the opening, but global demand worries quickly pulled them down. Brent crude oil prices fell 13 cents to $76.68 per barrel, and US crude oil prices fell 22 cents to $73.30 per barrel.