Global market meltdown

Japan’s Nikkei had its worst day since 1987 on Monday, with other Asian markets plunging and European stocks nearing six-month lows.

Stock markets around the world plunged on Monday, with shares tumbling amid fears that the US could be heading for a recession, pushing investors into panic-selling mode. Japan’s Nikkei is leading the sell-off, down 12.4% – its worst day since the 1987 Black Monday crash.

The situation began to unfold last week after the US released a report showing weaker than expected employment data. Economists say the slump reflected deepening concerns over the overall state of the US economy. Wall Street closed sharply down on Friday, with the technology-heavy Nasdaq Composite falling into a correction, with the slide continuing on Monday.

Asian markets plunging

Japan’s benchmark Nikkei 225 stock index led the global meltdown with its biggest one-day loss ever on Monday, plunging 12.4%. Analysts have attributed the drop to US jobs data and the rising yen. The scale of the losses marked the worst day for the index since the Black Monday crash of 1987. The Tokyo Stock Price Index (Topix) also dropped by 12.23% on Monday.

The yen strengthened to 142.67 against the US dollar on Monday, from 146.45 on Friday, representing a level not seen since January. A stronger yen is viewed as a negative factor for Japanese exporters.

The rout was echoed in other Asian markets, with South Korea’s KOSPI stock index plunging by 8.8% amid a slump in tech shares, marking its worst trading session since the global financial crisis of 2008. Amid steep declines, trading was halted for short periods of time in Japan and South Korea. The rapid sell-off triggered circuit breakers – which pause trading amid strong volatility – for the first time since March 2020.

Stocks in Taiwan also fell more than 8% on Monday. Indian stock market benchmarks – the Sensex and the Nifty 50 – declined over 3%. The MSCI World index of Asia-Pacific shares outside Japan was down by 4.2%.

The stronger yen set off a domino effect, triggering a global unwinding of carry trade, a trading strategy in which an investor borrows money from a country with low interest rates through a weaker currency, and reinvests the money in another country’s assets, which gives a higher rate of return.

Stock rout expanding globally

Fears over weakness in the US economy and volatile markets have rippled around the world. All major European stock markets started Monday down, with shares across all sectors plunging to near six-month lows.

The pan-European benchmark STOXX 600 index dropped by more than 3% in early morning trading. France’s benchmark index CAC 40 is down by 2.78%, Spain’s IBEX dropped 2.8%, Germany’s DAX plunged 2.2%, while the UK’s FTSE 100 lost 2.17% as of Monday morning.

The S&P/ASX 200 in Australia has tumbled by 12.8%.

Stock turmoil leaking into crypto market

The global turbulence extended to the crypto market, with the price of Bitcoin dropping more than 17% below $50,000 on Monday for the first time since February. It touched a low of $49,351 in early trading, and while it bounced back above the $50,000 threshold, it was still down 13% for the day. The price of Ether, another cryptocurrency, has also fallen almost 17% to $2,200.

What triggered the meltdown

US economic data has been below expectations for a few months, particularly in July. The country has seen an unexpected rise in the unemployment rate, according to the July payrolls report released by the Bureau of Labor Statistics on Friday. The economy added just 114,000 jobs last month, far below economists’ estimates of 175,000 jobs. The unemployment rate surged to 4.3% from 4.1%.

“The scenario of higher unemployment constraining spending and further restraining hiring and incomes and economic activity leading to a recession is the feared scenario here,” Tan Boon Heng of Mizuho Bank in Singapore said in a report.

On top of this, the latest data from the Institute for Supply Management revealed that US manufacturing activity dropped in July from the month before, marking the fourth straight month of contraction.

This led to markets betting on the Federal Reserve cutting rates in September by a full 50 basis points, sparking debate among economists about the overall health of the US economy, with its enormous influence in the global financial markets.

What’s next? Investor expectations

While economists worldwide believe that the market rout reflects mounting concerns over a weaker US economy, they say extrapolating the latest jobs data could be an overreaction as it is only a one-month reading. At the same time, fears over the health of the world’s biggest economy and the risk of military escalation in the Middle East amid rising tensions between Israel and Iran are placing further pressure on the market.

“There are two things impacting pricing, one is the recession risk and that’s the main worry, but on top of that there is a bit of anxiety around geopolitics and the expected retaliation from Iran and Hezbollah after the Israeli strikes,” Samy Chaar, the chief economist at Lombard Odier, told Reuters.

Economists do not expect the markets to crash, though they do not anticipate a quick bounce back amid weaknesses in US Big Tech and the ongoing Middle East tensions.

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