Japanese and Australian stocks plunged heavily on Monday, pitching the country’s major indices into their third straight session of massive declines as global markets shudder at the prospect of a US recession.
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Traders on the floor of the New York Stock Exchange. Photo / Eduardo Munoz Alvarez, Getty Images, File
Japanese and Australian stocks plunged heavily on Monday, pitching the country’s major indices into their third straight session of massive declines as global markets shudder at the prospect of a US recession.
In a rout that produced declines on other Asian markets, Japan’s broad Topix index was down as much as 7.3 per cent, while the Nikkei 225, which on Friday suffered its biggest one-day fall since the 1987 crash, was down 5.9 per cent.
The sell-off in Japan, said traders in Tokyo, is likely to continue in Europe and the US.
Investors are prepared for renewed volatility on fears that the Federal Reserve has been too slow to respond to signs the US economy is cooling and may be forced to cut interest rates.
Traders in Tokyo said that the selling was part of a major correction and de-risking move by global funds.
But there were Japan-specific factors at play which have hit Tokyo equities much harder, in particular the earnings implication of a yen that has strengthened by about 9% from around ¥161 against the dollar in mid-July to Monday’s level of ¥145.60.
“The Japanese market is seen by global investors as a warrant on global trade,” said the Japan head of one global pension fund.
“So if you are in severe de-risking mode, as a lot of investors are at this point because of US recession fears and geopolitics, it makes sense you take profits in a Japanese market that has done very well so far this year.”
The Australian sharemarket suffered its biggest two-day sell-off in more than two years, after the global recession fears spooked investors.
At 11am AEST on Monday, the benchmark S&P/ASX200 index was down 214 points, or 2.69% to 7729.2, while the broader All Ordinaries had dropped 223.5 points, or 2.8% to 7946.9.
It followed the ASX finishing 2.11% lower on Friday, meaning a 4.8% dip for the bourse over the past two days of trading.
“I think we’re in a fairly messy position here,” AMP chief economist Shane Oliver told Sky News.
“It looks to me like the inflation scare we saw earlier in this year in the US and more recently in Australia, has unnecessarily delayed monetary easing.
“And now, of course, the financial markets are starting to worry about that higher risk of recession.”
Every ASX sector was in the red in early trading, with IT stocks leading the way down 4.5%.
BHP was down 2.2%, while the Big Four banks were between 3.4 and 3.9% lower.
Monday’s hiccup amounted to the biggest two-day fall since the ASX plunged 4.28% in the middle of June 2022, amid anticipation of super-sized US central bank rate hikes.
On Wall Street, the Dow Jones Industrial Average fell by more than 1.5% on Friday, while the S&P500 slipped 1.84%, after US unemployment jumped to a near three-year high of 4.3%.
Weak US jobs data on Friday piled further pressure on a market already buckling under an investor exodus from expensive technology stocks, with the Nasdaq index falling into correction territory last week and haven Treasuries rallying sharply.
“The narrative has literally changed overnight,” said Torsten Slok, chief economist at Apollo. Investors were weighing up whether to treat Friday’s jobs number as a statistical quirk or whether the US was “now in a more severe slowdown period”, he added.
The Fed kept rates on hold when it met last week, but the severity of the market reaction after the jobs data indicates that investors believe the central bank may have made a mistake in not cutting rates.
JPMorgan economists joined the growing chorus of Wall Street strategists over the weekend calling for the Fed to reduce rates by 0.5 percentage points at its next two meetings, in response to nascent signs of weakness.
Srini Ramaswamy, JPMorgan’s managing director of US fixed income research, wrote on Saturday that he had turned “bullish on volatility” given investors’ newfound uncertainty about the path of interest rates and summer illiquidity.
The Vix index of expected US stock market turbulence — commonly known as Wall Street’s “fear gauge” — climbed as high as 29 points on Friday, the highest since the US regional banking crisis in March last year.
A sell-off which started in richly valued big-tech stocks, many of which reported earnings last week, gained wider traction after the Fed decision and jobs data.
The Nasdaq Composite, the tech-heavy US index, finished the week 3.4% lower and has declined more than 10% since July’s all-time high.
Treasuries rallied, with the yield on the US 10-year hitting its lowest level since December at 3.82%.
On Saturday, Warren Buffett’s Berkshire Hathaway disclosed that it had halved its position in Apple in the second quarter, while raising its cash position to a record $277 billion (NZ$465.6b) and buying Treasuries.
Investors are betting the Fed will lower borrowing costs by more than a full percentage point by the end of the year to counter a weakening economy.
“I think interest rates are too high,” said Rick Rieder, chief investment officer of global fixed income at BlackRock.
While the economy was still “relatively strong”, the Fed needed to get rates to around 4% “sooner rather than later”, Reider said.
However, Diana Iovanel, senior markets economist at Capital Economics in London, argued that equity “valuations are still far from pointing to an economic cataclysm”.
She added: “Renewed fears of a US recession have increased the chances of additional rate cuts from the Fed. But we don’t think that the US economy will stand in the way of an equity rally for much longer.”
Written by: Leo Lewis in Tokyo and Arjun Neil Alim in Hong Kong, Philip Stafford and George Steer in London, and Harriet Clarfelt and Kate Duguid in New York. Additional reporting by AAP.
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