Anika Begay
(Reuters) – Stock markets tumbled and bonds rallied on Monday as fears that the United States could be heading for a recession prompted investors to flee risk assets, betting that interest rates will have to fall quickly to save growth.
It lost as much as 12%, hitting a 9-month low, entering bear territory and marking its biggest one-day percentage drop since October 1987.
This comes after the tech sector corrected 10% from its all-time high at the start of 2022 on Friday. Nasdaq futures fell 3.5% on Monday.
The yen hit a 7-month high.
QUOTES:
BEN BENNETT, HEAD OF ASIA INVESTMENT STRATEGY, LGIM, HONG KONG
“It looks like a lot of the trades that were successful in the first half of the year are unwinding, some more quickly than others. I don’t think the Bank of Japan rate hike or Friday’s U.S. jobs report warrant such a strong reaction, so I suspect we’re seeing traders stalling as volatility increases.”
RICHARD KAYE, PORTFOLIO MANAGER, COMGEST, TOKYO
“The sharp narrowing of the yield gap between Japan and the US has caused the yen to partially normalize, and erroneous foreign hot money flows into banks and yen stocks are rightly being sold, which is at the heart of today’s and Friday’s move. SMID – GMO Payment, Fast Retailing – domestic claims are significantly outperforming and have risen in absolute dollar terms for the month, ahead of major global indices.
“In short, not just the currency, but the entire ‘value’ trade in Japan, which has been hijacking our market for two years, is being dismantled, and that is great news for the serious investors who make up the bulk of market participants, the silent majority eclipsed by recent hot money movements.”
KYLE RODDA, SENIOR FINANCIAL MARKET ANALYST, CAPITAL.COM, MELBOURNE
“Markets are in crisis and the world is in a sea of red. The rapid movement of the yen is putting downward pressure on Japanese stocks, but it is also leading to a disruption of a major carry trade: investors had been leveraging by borrowing in yen to buy other assets, mainly U.S. technology stocks.
We are essentially seeing mass deleveraging, as investors sell assets to finance their losses. The speed of the move has caught many investors by surprise; there is now a lot of panic selling, which is what causes these non-linear reactions in asset prices to fairly simple fundamental dynamics.”
DANIEL TAN, PORTFOLIO MANAGER, GRASSHOPPER ASSET MANAGEMENT, SINGAPORE
“In our view, five Fed rate cuts by the end of 2024 seem unlikely. More likely are two cuts, one in September and one in November, with a total of up to 75 basis points by the end of the year. This suggests potential opportunities to increase duration in the coming months. Overall, we believe emerging market bonds will perform well through the end of the year in an environment of gradually declining interest rates.
“There may still be room for a continuation of the recent sell-off in stocks, given the significant rally in technology stocks earlier this year and investors looking to sell assets to cover losses.”
GEORGE BOUBOURAS, HEAD OF RESEARCH, K2 ASSET MANAGEMENT, MELBOURNE
“Markets are clearly concerned about the recent weaker economic data. However, extrapolating last Friday’s payroll data seems like an overreaction, as it is only a monthly reading. The rolling quarter will be a better guide. It is clear that the recent data momentum in the US has slowed.
Given that the Fed is expected to start cutting rates (Implied Futures) before the US elections (November 5), this could be seen as an optical problem, despite the logic that conditions justify a rate cut. This could add to some pre-election volatility.”
RYOTA ABE, ECONOMIST, SMBC, SINGAPORE
“I think it will move to the 140-145 zone due to a worse-than-expected NFP (US nonfarm payrolls report) and tensions in the Middle East. And both reasons will likely weigh on Asian markets as market participants will be hesitant to take risks in this situation.
“A stronger yen will also weigh on the Nikkei index, as corporate margins will decline, as many companies were not expecting such a sharp and sudden rise in the Japanese yen at all.”
MASAFUMI YAMAMOTO, CHIEF CURRENCY STRATEGIST, MIZUHO SECURITIES, TOKYO
“There is a risk that the dollar-yen will fall further. The short-term support will be 144.50, where the 90-week moving average is located. If that is the case, I think the next target will be 140.
“But I would say that this market valuation of a 50% base rate cut by the Fed at the September meeting is overblown. The US economy is showing signs of a slowdown, but it is not as bad as the market is pricing it in.”
CHARU CHANANA, MARKET STRATEGIST, SAXO MARKETS, SINGAPORE
“US economic data remains key at the moment and the more the US soft landing hypothesis is questioned, the stronger we can observe a retreat in equity and carry strategies, where positioning has also been expanded.
“However, markets have gotten a little too far ahead of the curve in expecting Fed rate cuts, and four rate cuts priced in for this year seems overblown given that the June dot plot showed only one cut and the structural inflation forces at play.”
