Nearly everything on Wall Street is tumbling as fear about a slowing U.S. economy worsens and sets off another sell-off for financial markets around the world.
The S&P 500 was down by 3.1 per cent in early trading, coming off its worst week in more than three months. The Dow Jones Industrial Average was down 2.5 per cent as of 9:50 a.m. ET and the Nasdaq composite slid 3.8%.
The drops were just the latest in a global sell-off following a 12.4 per cent plunge in Japan’s Nikkei 225, its worst day since the Black Monday crash of 1987.
It was the first chance for traders in Tokyo to react to a Friday jobs report that showed hiring by U.S. employers slowed last month by much more than expected. That has convulsed financial markets, vanquishing the euphoria that had taken the Nikkei 225, a stock market index for the Tokyo Stock Exchange, to all-times highs of over 42,000 in recent weeks.
The shakeup began just a couple of days after U.S. stock indexes had jumped to their best day in months, in the wake of Federal Reserve chair Jerome Powell setting the stage for possible rate cuts to begin in September.
But after Friday’s jobs report, there have been rising worries that the Federal Reserve may have kept its main interest rate at a two-decade high for too long, raising risks of a recession in the world’s largest economy.
Now, traders are wondering if the damage has been so severe that the Federal Reserve will have to cut interest rates in an emergency meeting, before its next scheduled decision on Sept. 18.
“The Fed could ride in on a white horse to save the day with a big rate cut, but the case for an inter-meeting cut seems flimsy,” said Brian Jacobsen, chief economist at Annex Wealth Management. “Those are usually reserved for emergencies, like COVID, and an unemployment rate of 4.3 per cent doesn’t really seem like an emergency.”
“The Fed could respond by stopping” the shrinking of its holdings of Treasurys and other bonds, which could put less upward pressure on longer-term yields, he said. “That could at least by a symbolic action that they’re not blind to what’s going on.”
A rate cut would make it less expensive for U.S. households and companies to borrow money, but it could take time for the effects to boost the economy.
A worldwide decline
Until Friday, there had been relatively few huge market swings in the past year.
A bonanza around artificial intelligence technology helped drive Big Tech stocks higher, while other areas of the market held up amid rising hopes for coming cuts to interest rates by the Federal Reserve.
But professional investors have been warning that shakier times may be ahead, given uncertainty about how quickly the Federal Reserve will cut interest rates and other big questions.
On Monday, the Nikkei closed down 4,451.28 points at 31,458.42 after dropping 5.8 per cent on Friday, making this its worst two-day decline ever.
European markets also opened lower Monday, with Germany’s DAX down 2.3 per cent at 17,267.00, the CAC 40 in Paris losing 1.9 per cent to 7,114.33 and the FTSE 100 in London 2.1 per cent lower at 8,004.19.
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Darkening the outlook for trading on Wall Street, early Monday, the future for the S&P 500 was 2.5 per cent lower and that for the Dow Jones Industrial Average was down 1.6 per cent.
Share prices have fallen in Tokyo since the Bank of Japan raised its benchmark interest rate on Wednesday. The Nikkei is now down 3.8 per cent from a year ago.
The Japanese yen also has fallen sharply, trading at 142.37 yen, down from 146.45 late Friday and sharply below its level of over 160 yen a few weeks ago.
Chipmakers hit hard
The latest setback has hit markets heavily weighted toward computer chipmakers like Samsung Electronics and other technology shares.
On Monday, South Korea’s Kospi plummeted more than nine per cent as Samsung’s shares sank 10.3 per cent. Taiwan’s Taiex also crumbled, losing 8.4 per cent as Taiwan Semiconductor Manufacturing Co., the world’s biggest chip maker, dropped nearly 10 per cent.
“To put it mildly, the spike in volatility-of-volatility is a spectacle that underlines just how jittery markets have become,” Stephen Innes of SPI Asset Management said in a commentary.
“The real question now looms: Can the typical market reflex to sell volatility or buy the market dip prevail over the deep-seated anxiety brought on by this sudden and sharp recession scare?”
Investors worry about drops
Even though worries over weakness in the U.S. economy and volatile markets have rippled around the world, the American economy is still growing, and a recession is far from a certainty.
But the mood was decidedly dark. The VIX, an index that measures how worried investors are about upcoming drops for the S&P 500, was up 105 per cent as of early Monday.
Investors will be watching for data on the U.S. services sector from the U.S. Institute for Supply Management due later Monday that may help determine if the sell-offs around the world are an overreaction, Yeap Jun Rong of IG said in a report.
