On Monday (August 5), the global stock market sell-off continued unabated, and the Japan stock market briefly surpassed the decline of the "Black Monday" in 1987. Fears of a recession in the United States have sent investors fleeing risky assets while betting on the need for interest rate cuts to save growth.
As fears of a slowdown in the United States intensify, traders have ramped up bets that the Fed will cut interest rates urgently, with a 60% chance of a 25 basis point cut within a week.
The carry trade was lifted and Japanese stocks collapsed
The release of carry traders exacerbates market volatility. The yen and Switzerland franc, which are safe-haven assets, rose sharply, and carry trades were lifted, causing some investors to dump profitable trades to raise capital to cover losses elsewhere. Such a surging sell-off led to the triggering of a circuit breaker in the Japan stock market.
Japan's benchmark Nikkei Stock Average closed down 12.40% at 31,458.42, its biggest one-day drop since October 1987, while the broader Topix fell 12.48% to 2,220.91, its biggest three-day drop since 1959. The Japanese yen rose 2%.
(Nikkei 225 Index Close and JPY/USD Level Since January 2024 Source: Reuters)
European and U.S. stock markets tumbled
European stocks closed down 2.17%, with the STOXX 600 closing down 2.17%, recovering from a loss of more than 3% to close at 487.05 points. The tech sector rebounded and closed down 0.9%. Still, all sectors and major exchanges fell, with utilities and oil and gas stocks both down more than 3%.
U.S. stocks closed sharply lower, with the Dow plunging more than 1,000 points, the Nasdaq falling 3.4%, and the S&P 500 posting its biggest one-day drop since 2022. The Dow fell 1,033.99 points, or 2.60 percent, to 38,703.27, the Nasdaq lost 576.08 points, or 3.43 percent, to 16,200.08 and the S&P 500 lost 160.23 points, or 3.00 percent, to 5,186.33.
"This is a dramatic narrative shift that shows how much the recent trend is dependent on expectations of a soft landing in the United States," said Charu Chanana, head of currency strategy at Saxo Bank A/S. "The more the United States soft landing hypothesis is questioned, the greater the likely retracement in equities." ”
Ted Alexander, chief investment officer at BML Funds, said the current market volatility was "a long time in the making" and should not cause panic.
"Everybody had expected this for a long time, and [that] was a good thing for active managers," he told CNBC via email, adding that the turmoil could actually attract equity investors back because stocks offer better value. "Don't give up some exposure to technology and growth stocks."
Gold briefly fell below 2370 before recovering above 2400
Gold prices fell more than 1% on Monday, though analysts said it was only a temporary pullback for safe-haven gold.
Spot gold was down 1.43% at $2,407.60 an ounce at press time. It fell more than 3% to an intraday low of $2,364.19 an ounce in early trading.
(Spot gold 30-minute trend chart Source: FX168)
Jim Wycoff, senior analyst at Kitco Metals, said: "Investors are panicking, they are selling everything they can, including gold and silver. ”
Although gold is considered a safe haven in such uncertain times, it has not been spared as investors have sold assets across the board.
However, analysts said that given the ongoing uncertainty of the economic and geopolitical crisis, as well as the expectation of a Fed rate cut, gold prices could regain their footing in the future. Gold prices have risen more than 16% so far this year. This bodes well for zero-yield gold.
Han Tan, chief market analyst at Exinity Group, said: "Heightened geopolitical tensions and expectations of further Fed rate cuts in the near future should create support conditions for gold. Eventually, once the situation calms down, gold prices should be able to hit new highs. ”
Bitcoin fell below $50,000 at one point
Cryptocurrencies have been hit by risk-off sentiment in global markets, with Bitcoin falling more than 16% at one point on Monday, falling below the $50,000 mark. Ether, which came in second, suffered its biggest drop since 2021.
At press time, Bitcoin was trading down 8.74% at $53,238, down 13.1% last week and its biggest drop since the collapse of the FTX exchange.
(Bitcoin Chart Source: FX168)
Just a few days ago, United States presidential candidate Donald · Trump's speech sparked optimism, pushing the price of Bitcoin, the world's largest cryptocurrency, above the $70,000 mark for the first time in more than a month, and the sell-off marked a stunning reversal in the price of Bitcoin, reflecting concerns about the economic outlook.
On August 2, United States Bitcoin exchange-traded funds (ETFs) experienced their largest outflows in about three months.
Hayden Hughes, head of crypto investments at family office Evergreen Growth, said that digital assets were partially victims ·of the unwinding of the yen carry trade.
"These investors are also dealing with a significant increase in hedging costs due to volatility in the USDJPY trading pair," Hughes said. ”
·Justin D'Anethan, head of business development for Asia Pacific at market maker Keyrock, said the crypto plunge appears to have been triggered in part by Ether, with social media rumors of institutional investors dumping Ether-related assets.
Data from Coinglass shows that about $900 million of crypto bullish positions have been liquidated in the last 24 hours, a sign of failed leveraged betting.
Khushboo Khullar, venture capital partner at Lightning Ventures, which invests in Bitcoin-related companies, said the stock market crash had sparked some "panic," prompting investors to scramble for liquidity to address margin calls. She believes that the pullback in cryptocurrencies is an "excellent buying opportunity".
The reason behind the crash?
The latest market nervousness stems from Friday's data showing a weak United States job market, triggering a closely watched recession indicator. Investors are also concerned about high valuations driven by the AI boom, while tensions in the Middle East have heightened risk aversion. The news that Berkshire Hathaway cut Apple's stake by nearly 50% also hit market sentiment.
The worrying July jobs report showed that the market is pricing in a 78% probability that the Fed will not only cut rates in September, but that it will be 50 basis points. The futures market is pricing in a 122 basis point cut this year to 5.25-5.5% for the funding rate, and expects rates to fall to about 3.0% by the end of 2025.
George Boubouras, head of research at K2 Asset Management, said the market was clearly concerned about the recent weakness in economic data. However, the reaction to last Friday's employment data seems to have been overdone as it was only a one-time monthly data. Three months of rolling data will provide better guidance. The momentum of recent data in the United States has clearly slowed. Recent good core inflation data in the United States, coupled with some comments from the Federal Reserve, led to market expectations of a 25 basis point rate cut in September.
Boubouras said overall earnings and credit conditions have held up fairly well, despite market volatility and concerns that the recent weak economic data will continue. This could add to some volatility given that futures markets expect the Fed to start cutting rates before the United States election (November 5).
Goldman Sachs has called for a larger rate cut
Economists at Goldman Sachs Group Inc. raised the probability of a recession in the United States next year from 15% to 25%, although they said there were reasons not to worry about a recession. "We increased the probability of a United States recession in the next 12 months by 10 percentage points to 25%," Goldman Sachs analysts said in a note, but they believe the Fed has a lot of room for policy easing, which limits the danger.
They join their peers at Bank of United States, Barclays, Citi and JPMorgan Chase in adjusting their forecasts for United States monetary policy, calling for earlier, larger or more rate cuts. Goldman Sachs now expects a 25 basis point rate cut in September, November and December.
"Our forecast assumes a recovery in job growth in August and that the Federal Open Market Committee (FOMC) will consider a 25bp rate cut to be sufficient to address any downside risks." "If we're wrong and the August jobs report is as weak as the July report, then a 50 basis point rate cut could be in September," they added. ”
JPMorgan analysts are more pessimistic, believing that United States probability of a recession is 50%. "Now that the Fed is clearly behind the curve, we expect a 50 basis point rate cut at the September meeting and another 50 basis point cut in November," economist Michael Feroli said. ”
With only three Fed meetings remaining, swap pricing reflects a growing belief among traders that the Fed needs to make an unusually large 50 basis point adjustment at a single meeting, or act between scheduled meetings – moving quickly to support growth.
Charlie Ripley of Allianz Investment Management said: "From the Fed's perspective, this does not mean making hasty decisions. ”
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