London and Wall Street stocks deepened their losses Monday 5 August as Japan’s stock market crash spread panic across trading floors over fears of recession in the US. With race riots in the UK, Israel stoking regional war in the Middle East, authorities killing hundreds of protesters in Bangladesh, and July being one of the hottest months on record – the world seems in more chaos than usual.
Japan stock market crash ripples outwards
Wall Street’s tech-heavy Nasdaq Composite index tumbled 6.3% at the open, with the S&P 500 falling 4.2% and the Dow dropping 2.7%.
Major European indices were down around 3% in afternoon trading.
Tokyo’s Nikkei tanked more than 12% in its worst day since the Fukushima crisis in 2011. It also suffered its biggest ever points loss, shedding 4,451.28.
The market meltdown was triggered by a weak US jobs report on Friday 2 August which showed the unemployment rate reached its highest since October 2021.
The report came two days after the US Federal Reserved decided, as expected, to keep interest rates at a 23-year high while signalling that it could cut them in September.
Market analyst Fawad Razaqzada said:
Investors are gripped by fears that the Federal Reserve has waited too long to pivot on its policy, especially in light of Friday’s disappointing US jobs data and a slew of other weak economic indicators pointing toward a looming recession.
Friday’s much-anticipated report showed the US economy added just 114,000 jobs last month, well down from June and far fewer than expected, and unemployment at 4.3%.
The dollar slides
The news came a day after lacklustre factory data. Investors fear the Fed’s high rates, which aimed to slash inflation, could be plunging the economy towards a hard landing and recession instead of the soft landing sought by the central bank.
Expectations that the Fed could cut more aggressively than expected from September, or even be forced into an emergency reduction this month, sent the dollar sliding against the yen.
The Japanese currency was boosted also by a Bank of Japan interest-rate hike last week, analysts said. Meanwhile, the dollar went under 142 yen for the first time since January.
Markets tumbled across the board Monday, with Brent North Sea crude reaching the lowest level in more than six months despite heightened Middle East tensions, while Bitcoin slumped more than 10% to under $50,000.
Analyst Patrick O’Hare said:
Aside from ongoing worries about a US recession, the continuation of the pressure on markets has been attributed to unwinding of the yen carry trade and geopolitical fears surrounding an expected Iranian military retaliation against Israel after Israel killed a high-ranking Iranian military official.
Stock market crash indicating a US recession?
Many investors have borrowed at low interest rates in a weak yen to invest in higher yielding currencies, but the abrupt surge in the yen as well as interest rate moves is upending the trade.
Some analysts pointed to the “Sahm rule”, which says an economy is in the early stages of recession if the three-month moving average of unemployment is 0.5 percentage points above its low over the previous 12 months. That was triggered by Friday’s data.
O’Hare also noted big falls in tech and semiconductor shares. That helped fuel sharp drops in Asia markets and US tech shares were also pulling down Wall Street indices.
Shares in AI chip manufacturer Nvidia plunged 14.6% at the start of trading on Monday. Shares in Facebook and Instagram parent company Meta slumped 7.2%. Microsoft and Google parent company Alphabet shares were down around 5%.
Featured image via the Canary
