Stocks routed in Asia, tumble in Europe as markets fear U.S. recession in wake of weaker than expected jobs report
Japan's benchmark stock index plunged 12.4% on Monday, compounding a global market rout set off by investor concerns that the the U.S. economy could be headed for a recession.
A report Friday showing hiring by U.S. employers slowed last month by much more than expected has convulsed financial markets, vanquishing the euphoria that had taken the Nikkei 225 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 after Federal Reserve Chair Jerome Powell set the stage for possible rate cuts to begin in September.
But after Friday's jobs report, worries are rising the Fed 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. 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.
"Specifically, the scenario of higher unemployment constraining spending and further restraining hiring and incomes and economic activity leading to a recession is the feared scenario here," Tan Boon Heng of Mizuho Bank in Singapore said in a report.
U.S. financial markets swooned Friday after the downbeat employment report. The S&P 500 sank 1.8% on the day, while the tech-heavy Nasdaq Composite slid 2.4% and fell into "correction" territory, or when stocks slide at least 10% from their previous high. The blue-chip Dow Jones Industrial Average sank 1.5%.
The dour mood on Wall Street looked set to continue Monday, with Nasdaq futures down roughly 800 point, or 4.2%, as of 7:09 a.m. Eastern Time, while S&P 500 and Dow futures were off 2.8% and 1.9%, respectively.
"Investors are feeling massive pain globally as the Nikkei historic 12%+ overnight sell-off has triggered market carnage, with U.S. markets trading heavy in the red across the board," Wedbush Securities analyst Dan Ives said in a report.
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 selloffs around the world are an overreaction, Yeap Jun Rong of IG said in a report.
Even though worries over weakness in the U.S. economy and volatile markets have rippled around the world, the U.S. economy is still growing and a recession is far from a certainty.
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. But professional investors have been warning that shakier times may be ahead given uncertainty about how quickly the Fed will cut rates and other big questions.
AI pullback
On Monday, the Nikkei closed down 4,451.28 points at 31,458.42. It had dropped 5.8% on Friday, making this its worst two-day decline ever. Stocks in Korea and Taiwan also fell sharply, with the three Asian markets all damaged as investors pull back from companies focused on artificial intelligence out of concern the sector has been overhyped.
European markets also opened lower Monday, with Germany's DAX down 2.3% at 17,267.00. The CAC 40 in Paris lost 1.9% to 7,114.33 and the FTSE 100 in London was 2.1% lower at 8,004.19.
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% 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.
The euro rose to $1.0952 from $1.0923.
"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?"