Joe McConnell
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Japanese stocks fell on Monday, dragging the country’s major indexes into a third straight session of sharp declines, as global markets shudder at the prospect of a U.S. recession.
In a rout that sent other Asian markets reeling, Japan’s Topix index fell as much as 7.3 percent, erasing virtually all of its gains since the start of the year. The Nikkei 225, which suffered its biggest one-day decline since the 1987 crash on Friday, fell 5.9 percent.
The sell-off in Japan was likely to continue in Europe and the United States, Tokyo traders said. Investors braced for renewed volatility on fears that the Federal Reserve was too slow to respond to signs of a cooling U.S. economy and could be forced to cut interest rates.
Tokyo traders said the sell-off was part of a major correction and a de-risking move by global funds. But there were Japan-specific factors at play that hit Tokyo stocks much harder, particularly the earnings implications of a yen that has strengthened about 9 percent from around ¥161 against the dollar in mid-July to ¥145.60 on Monday.
“The Japanese market is seen by global investors as a hedge for global trade,” said the Japanese head of a global pension fund. “So if you’re in a severe de-risking mode, as many investors are right now because of recession fears and U.S. geopolitics, it makes sense to take profits in a Japanese market that has done very well so far this year.”
The sell-off in Japan was echoed in other Asian markets. South Korea’s benchmark Kospi fell more than 4 percent in morning trading, while Australia’s S&P/ASX 200 index fell nearly 3 percent. Taiwan’s main stock index fell more than 6 percent.
Weak U.S. jobs data on Friday added further pressure to a market already struggling as investors flee expensive technology stocks, with the Nasdaq index falling into correction territory last week and Treasuries rallying sharply.
“The narrative has literally changed overnight,” said Torsten Slok, chief economist at Apollo. Investors were weighing whether to treat Friday’s jobs number as a statistical oddity or whether the U.S. was “now in a more severe slowdown,” he added.
The global turbulence has spilled over into the cryptocurrency market, with the price of bitcoin falling more than 8% to $54,000 on Monday, while the price of ether, another cryptocurrency, fell nearly 17%.
The Fed kept rates unchanged at last week’s meeting, but the market reaction aVsceker the jobs data suggests investors believe the central bank may have made a mistake in not cutting rates.
Over the weekend, JPMorgan economists joined a growing chorus of Wall Street strategists calling on the Fed to cut rates by 0.5 percentage points at its next two meetings.
Srini Ramaswamy, managing director of U.S. fixed income research at JPMorgan, wrote Saturday that he had become “volatility bullish” given renewed investor uncertainty about interest rates and summer illiquidity.
The Vix index of expected turbulence in the US stock market, commonly known as Wall Street’s “fear gauge”, rose to 29 points on Friday, its highest level since the US regional banking crisis in March last year.
The tech-heavy Nasdaq Composite ended the week down 3.4 percent and is down more than 10 percent from its all-time high in July. Treasuries rallied, with the yield on the 10-year U.S. note hitting its lowest level since December at 3.82 percent.
On Saturday, Warren Buffett’s Berkshire Hathaway announced that it had cut its stake in Apple in half in the second quarter, while also increasing its cash position to a record $277 billion and buying Treasuries.
Investors are betting that the Fed will cut borrowing costs by more than a percentage point by the end of the year to counter the weakening economy.
“I think interest rates are too high,” said Rick Rieder, BlackRock’s global fixed income investment manager. While the economy was still “relatively strong,” the Fed needed to get rates to around 4 percent “as soon as possible,” Rieder said.
However, Diana Iovanel, senior markets economist at Capital Economics in London, said that “equity valuations are still far from signaling an economic cataclysm.”
He added: “Renewed fears of a US recession have raised the possibility of further rate cuts by the Fed. But we don’t think the US economy will hinder a stock rally for much longer.”
Further information is provided by Philip Stafford and George Steer in London and Harriet Clarfelt and Kate Duguid in New York
