Stock markets plunged on Monday, with Japanese shares experiencing losses surpassing their 1987 “Black Monday” drop.
Concerns about a U.S. recession led investors to shy away from risks, betting on necessary rate cuts to stimulate growth.
The yen and Swiss franc, both safe havens, surged as crowded carry trades unraveled, prompting speculation that some investors were selling profitable trades to cover losses elsewhere.
The selling was so intense that circuit breakers were triggered across Asian stock exchanges.
Japan’s benchmark Nikkei average (.N225) closed 12.40% lower at 31,458.42, marking its largest one-day decline since October 1987. The broader Topix (.TOPX) also fell 12.48% to 2,220.91.
European stocks (.STOXX) opened 1.8% lower, with France’s CAC 40 (.FCHI) down 2.1%, Spain’s IBEX (.IBEX) down 2.8%, and the UK’s FTSE 100 (.FTSE) off 1.7% amid fears of a global recession following weak U.S. data.
Treasury bonds saw high demand, with U.S. 10-year yields dropping to 3.723%, the lowest since mid-2023, before slightly recovering 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 50 basis points.
Futures suggest a total of 122 basis points of cuts in the 5.25-5.5% funds rate this year, and rates around 3.0% by the end of 2025.
Goldman Sachs analysts increased their 12-month recession odds by 10 percentage points to 25%, noting the Fed’s considerable scope to ease policy. Goldman now expects 25 basis point cuts in September, November, and December.
They predict job growth will recover in August, making 25 basis point cuts sufficient. However, if August’s employment report is as weak as July’s, a 50 basis point cut in September is likely.
JPMorgan analysts were even more pessimistic, assigning a 50% probability to a U.S. recession. Economist Michael Feroli expects a 50 basis point cut in September, followed by another in November. He also suggested that if data worsens, an inter-meeting easing might be considered, although Fed officials could be concerned about misinterpretation of such a move.
Investors will get a sense of employment in the service sector from the ISM non-manufacturing survey on Monday, with analysts expecting a rebound to 51.0 after June’s unexpected drop to 48.8. Earnings reports from companies like Caterpillar (CAT.N) and Walt Disney (DIS.N) will provide more insight into the state of consumer and manufacturing sectors. Healthcare heavyweights, including Eli Lilly (LLY.N), will also report.
The significant drop in Treasury yields overshadowed the U.S. dollar’s typical safe-haven appeal, causing it to fall 0.4% against a basket of major currencies. The dollar dropped 3.28% against the yen to 141.675, while the euro fell 2.12% to 156.46.
However, the euro rose against the dollar to $1.0929. The Swiss franc benefited from the risk aversion, with the dollar dropping 1.07% to six-month lows of 0.8485 francs.
Jonas Goltermann, deputy chief markets economist at Capital Economics, noted that the shift in expected interest rate differentials against the U.S. outweighed the negative risk sentiment. He predicted that if the recession narrative gains traction, the dollar could rebound as safe-haven demand dominates currency markets.
Investors are also betting on more aggressive easing by other major central banks, with the European Central Bank expected to cut rates by 67 basis points by Christmas.
In commodity markets, gold lost some of its safe-haven appeal, down 0.5% to $2,431 an ounce. Oil prices fell due to concerns about global energy demand and the potential impact of a widening conflict in the Middle East. Brent crude dropped 64 cents to $76.17 a barrel, while U.S. crude fell 65 cents to $72.87 per barrel.
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