A global stocks selloff intensified on Monday as concerns grew that the Federal Reserve is behind the curve with policy support for a slowing US economy, sending investors into the safety of bonds.
Nasdaq 100 futures tumbled more than 6 per cent and S&P 500 contracts were down more than 3 per cent. In Japan, both the Topix and Nikkei indexes fell over 13 per cent. Taiwan's benchmark had its worst day on record while a gauge of Asian shares slipped the most in over four years. The yen rallied over 2.5 per cent against the dollar.
The selloff was fueled by data Friday that showed the US jobs market weakening, which triggered a closely watched recession indicator. The Nasdaq entered a technical correction as investors fretted about elevated valuations from the artificial intelligence rally.
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"It's a pretty dramatic shift in narrative, which shows how much of the recent trends were backed by expectations of a US soft landing," said Charu Chanana, head of currency strategy at Saxo Bank A/S. "The more the US soft landing assumption gets questioned, the further pullback we could see in equities."
The 10-year Treasury yield fell 10 basis points to 3.7 per cent, the lowest on a closing basis on more than a year. Bond traders have repeatedly misjudged where interest rates have been headed since the end of the pandemic, at times overshooting in both directions. Global bonds erased their losses for the year, as signs of US economic deterioration fueled demand for fixed-income.
Japan's benchmark 10-year bond yield fell to its lowest since April, slipping as much as 17 basis points on Monday. The nation's biggest lender Mitsubishi UFJ Financial Group Inc. saw its shares post their biggest intraday drop on record as the falling bond yields threatened to eat into loan margins.
The global equity declines reflected worries on the economic outlook, geopolitical risks and questions over whether heavy investment into artificial intelligence will live up to the hype surrounding the technology. Economists at Goldman Sachs Group Inc. increased the probability of a US recession in the next year to 25 per cent from 15 per cent, although it added there are reasons not to fear a slump.
Sentiment was also weighed upon by news that Berkshire Hathaway Inc. had slashed its stake in Apple Inc. by almost 50 per cent as part of a massive second-quarter selling spree.
Meanwhile, the MSCI emerging-market stock index slumped more than 3 per cent, on track for the biggest one-day drop since March 2022.
Developing-nation currencies pushed higher - led by Malaysia's ringgit - while the Mexican peso's slump extended as traders continued to unwind emerging-market carry trades. The sudden appreciation in funding currencies, such as the yen and China's yuan, have damaged the carry trade, which typically involves traders borrowing at lower rates to invest in higher-yielding assets.
Elsewhere, oil fluctuated near a seven-month low as a selloff in wider financial markets countered rising tensions in the Middle East. Israel is bracing itself for a possible attack from Iran and regional militias in retaliation for assassinations of Hezbollah and Hamas officials. Cryptocurrencies also reeled from risk aversion in global markets on Monday.
Fed cuts
With just three Fed meetings left, swap pricing reflects the growing perception that the central bank will need to make an unusually large half-point move at one of the gatherings or act between its scheduled meetings "- moving rapidly to bolster growth.
Still, large policy moves with an aggressive response could imply an emergency, triggering even more jitters among traders, with Goldman Sachs increasing the probability of a recession in the next year to 25 per cent from 15 per cent.
"From a Fed perspective, this does not translate into making hasty policy decisions, but it should help them remove the rose-tinted glasses when assessing policy decisions at the next meeting," said Charlie Ripley at Allianz Investment Management.
Stocks are likely to fall when the Fed delivers its first rate cut because the pivot will come as data signal a hard "- rather than soft "- landing for the US economy, according to Bank of America Corp.'s Michael Hartnett.
In the history of the start to Fed easing since 1970, cuts in response to a downturn have proved negative for stocks and positive for bonds, the BofA strategist wrote in a note, citing seven examples that demonstrated this pattern. "One very important difference in 2024 is extreme degree to which risk assets have front-run Fed cuts," Hartnett said.
Some of the main moves in markets:
Stocks
• Hang Seng futures fell 0.4% as of 7:18 a.m. Tokyo time
• S&P/ASX 200 futures fell 1.5%
• Nikkei 225 futures fell 3.1%
• S&P 500 futures fell 0.8%
Currencies
• The Bloomberg Dollar index was little changed
• The euro was little changed at $1.0921
• The Japanese yen was little changed at 146.44 per dollar
• The offshore yuan was little changed at 7.1630 per dollar
• The Australian dollar was little changed at $0.6514
Cryptocurrencies
• Bitcoin fell 0.8% to $58,672.16
• Ether fell 0.6% to $2,735.23
Bonds
• The yield on 10-year Treasuries declined 19 basis points to 3.79% on Friday
Commodities
• Spot gold fell 0.1% to $2,443.24 an ounce
• West Texas Intermediate crude rose 0.4% to $73.78 a barrel
