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Japan’s stock market plummeted 12 per cent on Monday, its worst day in 37 years, as global markets were rattled by the prospect of a US recession.
In a rout that spread to equity benchmarks around the world, the Topix index wiped out its gains for the year, the sharpest sell-off since “Black Monday” in October 1987.
In Europe, the benchmark Stoxx Europe 600 shed 2.4 per cent. Futures markets indicated the momentum was likely to extend to the US. Contracts tracking the Nasdaq 100 were trading down 4.2 per cent while the S&P 500 was expected to open 2.5 per cent lower.
Traders in Tokyo said Monday’s plunge was sparked by an exodus of global investors from the Japanese market, which had notched up sizeable gains earlier in the year. Tokyo equities were also hit by a yen that has strengthened by about 12 per cent since mid-July, helped by last week’s interest rate rise from the Bank of Japan. On Monday, the yen soared 3 per cent to ¥142.27 against the dollar, a headwind for Japan’s exporters.
“Japan seems to be the epicentre of a lot of movement today,” said Jason Liu, head of Apac equity and derivative strategy at BNP Paribas. “There appears to be a genuine broad-based Japan liquidation by global funds.”
Elsewhere, markets extended declines amid fears that the Federal Reserve has been too slow to respond to signs the US economy is weakening, and may be forced to play catch-up with a series of rapid interest rate cuts, possibly beginning with an emergency move before the next policy meeting in September.
Markets now expect 1.25 percentage points of cuts — five quarter-point reductions — across the Fed’s final three meetings of the year. One-week swaps rates show a roughly 40 per cent chance of an unscheduled quarter-point cut to borrowing costs over the coming week.
Investor concerns over the health of the world’s biggest economy and the rising tensions between Israel and Iran have piled further pressure on a market already buckling under an investor exodus from high-flying technology stocks.
The sell-off was also exacerbated by the unwinding of the so-called yen carry trade, in which traders had taken advantage of Japan’s low interest rates to borrow in yen and buy risky assets.
The market has suddenly moved “from a warm, summer’s day straight into autumn”, said Antonio Cavarero, head of investments at Generali Insurance Asset Management.
“The pockets of pain are in those trades that were based on cheap funding in the Japanese yen space and anything in tech,” he said, adding that “this looks like a healthy, long-overdue market correction”.
Futures on the Vix index of expected US stock market turbulence — commonly known as Wall Street’s “fear gauge” — climbed above 40 points on Monday, the highest since the early stages of the Covid-19 pandemic.
The Fed kept rates on hold when it met last week, but market reaction after weaker than expected US jobs data on Friday indicates that investors believe the central bank may have made a mistake in not cutting rates.
“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 about 4 per cent “sooner rather than later”, Rieder said.
The tech-heavy Nasdaq Composite was set to extend declines of more than 10 per cent since July’s all-time high, as investors grow anxious about the sustainability of a stock market rally this year fuelled by a frenzy over artificial intelligence.
Adding to the pressure, 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 $277bn and buying Treasuries.
Apple shares were down 8 per cent in pre-market trading. Nvidia fell nearly 10 per cent ahead of the New York open.
Trading in both Topix and Nikkei futures were suspended during the afternoon session as the selling frenzy continued into the close, hitting “circuit breaker” levels that automatically stop trading. In South Korea, similar circuit breakers were triggered for the first time in four years.
South Korea’s Kospi benchmark fell 8.8 per cent while the Australian S&P/ASX dropped 2.5 per cent. India’s Sensex lost 2.6 per cent.
The global turbulence extended to the cryptocurrency market, with the price of bitcoin falling nearly 16 per cent to $52,740, while the price of ether, another cryptocurrency, has fallen almost 17 per cent to $2,200.
Additional reporting by Philip Stafford in London and Harriet Clarfelt and Kate Duguid in New York
