The fear of an economic slowdown in the world’s largest economy drove investors into safe havens and led them to speculate on imminent interest rate cuts to support growth. Particularly in Japan, where the benchmark Nikkei lost more than twelve percent, the unexpected interest rate hike by the Bank of Japan the previous week added to the situation.
“We have increased our probability of a recession in the next ten months by ten percentage points to 25 percent,” stated analysts at the US bank Goldman Sachs in a recent study. Even more pessimistic are analysts from JPMorgan, who estimate the probability of a recession in the US at 50 percent.
In anticipation of an economic downturn, Goldman Sachs now expects interest rate cuts from the US Federal Reserve (Fed) in September, November, and December by a quarter percentage point each. The Fed had postponed the much-anticipated interest rate cut just last week.
4,450 Points Loss
According to the “Financial Times”, the Nikkei index suffered its largest single-day loss by points: 4,450 points. This is significantly more than the “Black Monday” triggered on Wall Street in October 1987, when it was 3,836 points. However, based on percentage points, the losses in 1987 were greater at 14.9 percent compared to 12.4 percent on Monday, as reported by the “Wall Street Journal”. The broader TOPIX index lost 12.2 percent in value. This erases the gains for the entire year in both indices. Already on Friday, the Nikkei faced severe losses of 5.8 percent.
According to several traders in Tokyo, multiple large hedge funds had given orders to sell all their open positions as the losses increased throughout the trading day. Thresholds for loss limits were reached multiple times, triggering automatic trading suspensions. This had last occurred four years ago.
European Markets Decline as Well
The development in futures indicated that the downward trend would continue in Europe and the US. At the start of trading, stock prices in London, Frankfurt, and Vienna fell and continued the losses from the previous week. The search for “safe havens” pushed the Swiss franc to its highest value against the euro since 2015.
“Black Monday” on the Stock Markets
Out of concern for the global economy and fears of recession in the US, Asian stock markets crashed on Monday. The Nikkei index in Tokyo experienced higher losses by points than on “Black Monday” in 1987. Trading had to be suspended several times due to dramatic price drops. European stock markets also started the day with significant losses.
Especially the US Federal Reserve’s decision to delay the next interest rate cut has made institutional investors nervous, according to market observers. There are concerns that this could exacerbate the downward trend of the US economy.
Profit-Taking by Nervous Investors
In Tokyo, traders expressed confidence that the massive stock sell-off is part of a larger correction by international funds, which are nervous due to the US economy and the difficult geopolitical situation—particularly the threat of a larger war in the oil-rich Middle East. In such an environment, it makes sense to take profits from the substantial increases that the Japanese stock market has experienced in recent months, said a director of the Japan operations of an international pension fund, who wished to remain unnamed.
The losses in Tokyo also weighed on other Asian markets, though to a much lesser extent. In China, investors remained cautious following recent economic data. Despite a growth acceleration in the Chinese services sector in July, as indicated by the Caixin/S&P Global Purchasing Managers’ Index (PMI), the markets did not show any positive momentum. In Asian currency trading, the Japanese yen significantly strengthened against the dollar.
Bitcoin Accelerates Decline
The overall uncertainty regarding the future global economic development is also hitting the cryptocurrency Bitcoin. The price of the oldest and most well-known cryptocurrency fell in the early hours on the Bitstamp trading platform to as low as $51,600 (around €47,600), reaching its lowest level since February. Since Friday evening, Bitcoin has lost about $10,000 in value. A similarly strong price drop last occurred in June 2022.
Last week, Bitcoin had already experienced a significant decline. Analyst Timo Emden from Emden Research referred to a “cocktail of uncertainty” that is currently weighing on Bitcoin. “Particularly the newly rekindled fears of recession in the US have caught investors off guard,” said Emden. Alongside Bitcoin, other cryptocurrencies were also under strong selling pressure at the beginning of the week.