Written by John Harris.
On Monday, Japanese stocks took a nosedive, marking the third consecutive session of significant declines as global markets grapple with the looming threat of a U.S. recession. Japan’s Topix index fell by as much as 7.3%, nearly erasing all its gains since the beginning of the year. Similarly, the Nikkei 225 plummeted 5.9%, a drop reminiscent of the 1987 crash.
The sell-off is expected to ripple through Europe and the U.S., according to Tokyo traders. Investors are bracing for renewed volatility, fearing that the Federal Reserve’s delayed response to the cooling U.S. economy may force rapid interest rate cuts. This sentiment is driving a major correction and de-risking by global funds.
Adding to Japan’s woes, the yen has strengthened by about 9% from mid-July, exacerbating the situation for Tokyo equities. “Global investors see the Japanese market as a proxy for global trade,” noted the head of a major global pension fund in Japan. “With heightened fears of a U.S. recession and geopolitical tensions, investors are understandably taking profits from a market that has performed well this year.”
Regional Market Impact
The Japanese market turmoil echoed across Asia, with South Korea’s Kospi benchmark dropping over 4% in early trading and Australia’s S&P/ASX 200 falling nearly 3%. Taiwan’s main stock market index suffered a decline of more than 6%. The weak U.S. jobs data released on Friday has intensified pressure on a market already strained by an investor exodus from high-value tech stocks. The Nasdaq index, now in correction territory, and sharply rallying Treasuries underscore the market’s instability.
“The narrative has literally changed overnight,” said Torsten Sløk, chief economist at Apollo. He noted that investors are weighing whether Friday’s jobs report was an anomaly or indicative of a more severe economic slowdown in the U.S. The turbulence has even affected the crypto market, with bitcoin’s price falling over 8% to $54,000 on Monday, and ether, another cryptocurrency, dropping nearly 17%.
The Fed’s decision to hold rates steady last week has been met with skepticism by investors, who believe the central bank might have erred by not cutting rates. Over the weekend, JPMorgan economists joined other Wall Street strategists in calling for a 0.5 percentage point rate cut at the Fed’s next two meetings. Srini Ramaswamy, JPMorgan’s managing director of U.S. fixed income research, expressed increased bullishness on volatility due to the uncertainty around interest rates and summer illiquidity.
Market Reactions and Future Expectations
The Vix index, known as Wall Street’s “fear gauge,” spiked to 29 points on Friday, the highest level since the U.S. regional banking crisis in March of the previous year. The tech-heavy Nasdaq Composite ended the week 3.4% lower, having declined more than 10% since July’s all-time high. Meanwhile, Treasuries rallied, with the yield on the U.S. 10-year bond hitting its lowest level since December at 3.82%.
Warren Buffett’s Berkshire Hathaway added to the market’s woes by revealing it had halved its position in Apple during the second quarter while increasing its cash reserves to a record $277 billion and purchasing Treasuries. Investors are now betting that the Fed will lower borrowing costs by more than a full percentage point by the end of the year to counter the weakening economy.
Rick Rieder, BlackRock’s chief investment officer of global fixed income, stated, “I think interest rates are too high. While the economy remains relatively strong, the Fed needs to lower rates to around 4% sooner rather than later.” Conversely, Diana Iovanel, senior markets economist at Capital Economics in London, suggested that despite fears of a U.S. recession, equity valuations are not pointing to an economic disaster. She added, “Renewed fears of a U.S. recession have increased the chances of additional rate cuts from the Fed, but we don’t think the U.S. economy will prevent an equity rally for much longer.”
Our Take
The current economic landscape, highlighted by this significant market turmoil, is a stark reminder of how interconnected and fragile the global economy has become. The notion of outsourcing even the U.S. President’s job due to economic conditions, as humorous as it sounds, underscores the absurdity of our political and economic systems. Such strategies, while entertaining to discuss, trivialize the serious issues at hand.
Our leaders need to focus on sustainable, meaningful solutions rather than gimmicks and cultural appropriations. This spectacle only diverts attention from the real problems that require diligent and thoughtful action. The public deserves better than to be left navigating a surreal political and economic landscape riddled with absurdities.
