- Stock markets in a sell-off - Concerns about the US economy
Worldwide, investors' nerves are frayed at the start of the week. Friday's market slide continued seamlessly into Monday. An unexpectedly weak U.S. jobs report over the weekend fueled fears of a U.S. recession and a significant slowdown in global economic growth, sending markets into a tailspin.
Market participants believe it's possible that the U.S. Federal Reserve has missed the window for timely rate cuts and may now be too late to lower interest rates. Once-positive economic news is now being perceived as negative, as it stokes recession fears. Geopolitically, tensions remain high due to the potential for an Iranian attack on Israel.
Correction in overheated tech stocks
The weak U.S. jobs data was accompanied by largely disappointing quarterly results from the overheated U.S. tech sector. The hype around the trend theme of Artificial Intelligence (AI) may have gone too far, traders say. On Monday, tech stocks in Asia suffered due to a report that chipmaker Nvidia is delaying the launch of new AI chips due to so-called design flaws. Nvidia had recently been the driving force behind the general market rally, benefiting from the boom theme of Artificial Intelligence.
"Investors are currently being confronted with two unpleasant facts," wrote analyst Jochen Stanzl of trading house CMC Markets. "On the one hand, growth in the area of Artificial Intelligence comes with enormous costs, which narrows margins and suddenly makes high stock valuations appear inflated. And on the other hand, the restrictive monetary policy of the European Central Bank and the Federal Reserve is now taking effect."
Fear gauge at highs since mid-2020
In Europe, markets went into a tailspin on Monday morning. The German DAX index temporarily lost around three percent and was heading towards the 17,000-point mark. Losses were similarly high for the Eurozone's leading index, the EuroStoxx 50. In the U.S., futures for the tech-heavy Nasdaq 100 index pointed to another decline of around four percent on Monday. The level of uncertainty in New York can be seen in the VIX fear gauge, which measures volatility in the stock market and reached a high not seen since mid-2020 on Monday.
12 percent drop in Japan
Compared to Europe, the losses in Japan seem almost mild, with the Nikkei 225 index suffering a more than 12 percent drop on Monday. Since the Tokyo leading index has now lost more than 20 percent from its July peak, market players are talking about a bear market, indicating pessimism and falling prices. The recent significant appreciation of the Japanese yen is heavily weighing on the stock prices of Japan's export-oriented companies. Unlike in Europe and the U.S., interest rate cuts are not a topic in Japan. Instead, the Japanese central bank could potentially raise interest rates.
International stock markets would now have to price in the risk of a recession, explained market expert Daniel Saurenz of investment platform Feingold Research. "The DAX, Nasdaq, and Nikkei were trading at record levels just a few weeks ago, and the Japanese are showing how quickly a party can end."
Investors shied away from risky assets at the start of the week, both in the U.S. and Europe, as evidenced by the performance of cryptocurrencies, which are typically seen as highly speculative. The Bitcoin, the oldest and most well-known cryptocurrency, continued to lose ground, with its price on the Bitstamp exchange dropping below $50,000, reaching its lowest level since February. Other cryptocurrencies also faced significant selling pressure.
Meanwhile, safe-haven assets such as the Japanese Yen and Swiss Franc benefited from the prevailing uncertainty in financial markets. The dollar fell to as low as 0.8448 Swiss Francs, its lowest level since January. German government bonds, also considered safe havens, remained in demand. Futures for 10-year German and U.S. bonds rose, with yields falling.
Gold, the crisis currency, held steady at around $2,422 per troy ounce (around 31.1 grams) on Monday. In mid-July, the gold price reached a record high of $2,483.
The weak U.S. jobs report and disappointing tech sector earnings sparked a surge in recession fears, causing the 'News' of market volatility to dominate headlines. Investors seeking safety in times of uncertainty are flocking to 'safe-haven' assets like the Japanese Yen and Swiss Franc, as shown by the fall of the US dollar against these currencies.
