Global markets, including equity and crypto markets, opened this week with record lows as fears that the US is headed into a recession, a rate hike by the Bank of Japan and a rate cut by the Bank fo England have triggered widespread sell offs.
- Among the worst hit is Japan, where shares tumbled by levels not seen in almost four decades.
- The Nikkei average closed 12.40% down, while the broader Topix lost 12.48%, according to Reuters.
- The Nikkei 225 index has lost 25% in the last month, which most analysts portend has now moved into firmly into bear territory and triggering circuit breakers in several Asian countries.
The price of Bitcoin, which is often a marker for crypto markets, fell by 10.16%.
Non Farm Payrolls (measures jobs added in the US) increased by 114,000 in July , a decline from 179,000 job additions in June – it was lower than expected. Unemployment rate rose from 4.1% in June to 4.5 % in July – highest since October 2021. The report is often seen as providing vital clues on the health of the US economy, and as a crucial indicator of the Fed’s policy trajectory.
Last week, The Bank of Japan raised its benchmark interest rate to ~0.25% from a 0%-0.1% range in a bid to contain inflation. While the move was widely expected, being only the second time Japan has raised interest in almost two decades, the economic backdrop and lack of ‘demand-driven’ inflation,
In the backdrop of other data, Japan’s move boosted the currency and has pushed a massive sell off of Yen carry trade positions which have had ripple effects on US stocks. When the Yen’s exchange rate against the USD was strong, investors would borrow in the currency and reinvest the money in other currencies and assets. This made sense when the interest rate was negative or 0%, but a stronger yen means the margins that many investors had invested in have either been wiped out or at risk of being wiped out.
The ripple effect has been a decline in the stock markets in Shanghai, India, Australia, Taiwan, and other markets by between 1% and 8%.
Nasdaq, Dow futures and S&P 500 futures fell by 4.31%, 1.5% and 2.3% respectively. While this is partially a ripple effect of the situation in Japan, and the US’s unemployment data, it is also widely seen as a market correction against AI and superconductor stocks driven growth over the past year.
Another effect has been the decline in the prices of various metals, especially gold, copper, and silver, in what is widely seen as speculative moves to cover losses in other investments.
Analysts believe the US Fed and regulators in Europe and Asia will be forced to cut rates in the next few months as it finds itself behind the market curve. Unlike the Bank of England, the US Fed declined to cut rates but the recent moves may force a rethinking with global repercussions.
The volatility Index (VIX), which is a measure of implied market volatility, popularly known as the “fear index”, jumped 120.27 percent, signaling increased market uncertainty and possible market turmoil stemming from global market sell-off amid developments in the major economies.
