Markets in turmoil as Japanese Nikkei nosedives 13 per cent

Stock markets tumbled on Monday and Japanese shares plummeted a gut-wrenching 13 per cent as fears the United States could be heading for recession sent investors rushing from risk while wagering that rapid fire rate cuts will be needed to rescue growth.

The safe haven yen and Swiss franc surged as crowded carry trades unravelled, sparking speculation some investors were having to unload profitable trades just to get the money to cover losses elsewhere. Such was the torrent of selling that circuit breakers were triggered in exchanges across Asia.

Nasdaq futures sank a deep 4.7 per cent, while S&P 500 futures dropped 12.4 per cent as the rout went world-wide. EUROSTOXX 50 futures fell 2.1 per cent and FTSE futures 1.2 per cent.

Japan’s Nikkei (.N225) shed a staggering 13 per cent to hit seven-month lows, a scale of losses not seen since the 2011 global financial crisis. MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) lost 4.2 per cent.

Chinese blue chips (.CSI300) dipped only 0.5 per cent, aided by a bounce in the Caixin services PMI to 52.1.

Japanese 10-year bond yields fell a steep 17 basis points to the lowest since April at 0.785 per cent, as markets radically reconsidered the prospect of another hike from the Bank of Japan.

Treasury bonds were in demand with 10-year yields hitting 3.723 per cent, the lowest since mid-2023.

Two-year yields dropped to 3.807 per cent, having already fallen 50 basis points last week, and could soon slide below 10-year yields, turning the curve positive in a way that has heralded recessions in the past.

The worryingly weak July payrolls report saw markets price in a 78 per cent chance the Federal Reserve will not only cut rates in September, but ease by a full 50 basis points. Futures imply 122 basis points of cuts in the 5.25-5.5 per cent funds rate this year, and see rates around 3.0 per cent by the end of 2025.

“We have increased our 12-month recession odds by 10pp to 25 per cent,” said analysts at Goldman Sachs in a note, though they thought the danger was limited by the sheer scope the Fed had to ease policy.

Goldman now expects quarter-point cuts in September, November, and December.

“The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks,” they added. “If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September.”

Analysts at JPMorgan were even more bearish, subscribing a 50 per cent probability to a US recession.

“Now that the Fed looks to be materially behind the curve, we expect a 50bp cut at the September meeting, followed by another 50bp cut in November,” said economist Michael Feroli.

“Indeed, a case could be made for an inter-meeting easing, especially if the data soften further — although Fed officials might worry about how such a move could be (mis)interpreted.”

SEEKING SAFE HARBOURS

Investors will get a read on employment in the service sector from the ISM non-manufacturing survey due later Monday and analysts are hoping for a rebound to 51.0 after June’s unexpected slide to 48.8.

This week has earnings from industrial bellwether Caterpillar (CAT.N) and media giant Walt Disney (DIS.N), which will give more insight into the state of the consumer and manufacturing. Also reporting are healthcare heavyweights such as weight-loss drugmaker Eli Lilly (LLY.N).

The huge drop in Treasury yields had also overshadowed the US dollar’s usual safe-haven appeal and dragged the currency down 0.4 per cent on a basket of majors.

The dollar shed another 2.2 per cent on the Japanese yen at 143.10, while the euro dived 1.9 per cent to 156.35. The single currency was holding firm on the dollar at $1.0934.

The Swiss franc was a major beneficiary of the rush from risk, with the dollar falling 0.9 per cent to touch six-month lows at 0.8485 francs.

“The shift in expected interest rate differentials against the US has outweighed the deterioration in risk sentiment,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.

“If the recession narrative takes hold in earnest, we would expect that to change, and the dollar to rebound as safe-haven demand becomes the dominant driver in currency markets.”

Investors had also increased wagers other major central banks would follow the Fed’s lead and ease more aggressively, with the European Central Bank now seen cutting by 67 basis points by Christmas.

In commodity markets, gold gained a safety bid and rose to $2,456 an ounce.

Oil prices started firmer amid concerns about a widening conflict in the Middle East, but worries about global demand soon dragged it down again.

Brent slipped 13 cents to $76.68 a barrel, while US crude lost 22 cents to $73.30 per barrel.