Fears of a US recession are driving global market sell-offs, with equities dropping sharply, the dollar weakening, and bonds and the yen strengthening. The global financial markets are witnessing a wave of risk aversion, intensifying dynamics that had already begun to emerge late last week when disappointing US economic data sparked fears of a recession in the world’s largest economy.
Asian markets closed poorly, with Japan’s Nikkei 225 Index down 12.4% to close at 31,458 points, the lowest level since December 2023. European equity markets opened sharply lower on Monday, with the broader Euro STOXX 50 index down 2.8%, reaching its lowest level since January and heading for its third consecutive day of losses. Italy’s FTSE Mib was the primary laggard, tumbling 3.5%, on track for its worst single-day drop since March 2023. Meanwhile, Germany’s DAX, France’s CAC 40, and Spain’s Ibex 35 all fell 2.5%.
Banking stocks were hit the hardest, with ING Groep’s shares tumbling 6.8%, followed by Société Générale, which fell 5%, Deutsche Bank, down 4.4%, UniCredit, down 4%, Intesa Sanpaolo, down 3.9%, BNP Paribas, down 3.9%, and Banco Santander, down 3.5%. In the bond market, yields declined along the German yield curve, with the 2-year yield down 6 basis points to 2.29%, its lowest since March 2023. The Bund yield fell 3 basis points to 2.14%, reflecting growing demand for safe-haven assets.
The euro rose against the dollar to 1.0950, reaching its highest level since March 2024, driven by the general weakness of the greenback. The Japanese yen saw five consecutive days of gains against the U.S. dollar, amid the unwinding of the „carry trade“ that had pushed the yen to multi-decade lows in July. On Monday, the USD/JPY exchange rate tumbled over 2.4%, marking its worst session since late 2022.
Recent US data revealed a worse-than-expected contraction in manufacturing activity last month, while the jobs report showed signs of worrisome cooling. The US economy added only 114,000 new nonfarm payrolls in July, sharply down from the previous figure of 179,000, and well below expectations of a 150,000 increase. The unemployment rate unexpectedly rose from 4.1% to 4.3%, reaching its highest since October 2021. Quarterly results from tech giants have been mixed, causing the S&P 500 index to close its third consecutive week in the red. Notably, Warren Buffett sold off almost half of his entire Apple stake, over $50bn worth of shares, bringing Berkshire’s cash holdings to a record high of $277bn.
The lower-than-expected economic data and the Wall Street pullback fuelled a rush to safe-haven assets, particularly US Treasury bonds, as investors increased their bets on Federal Reserve interest rate cuts. Market-implied probabilities derived from interest rate futures saw a shakeup, with traders now almost fully pricing in a 50-basis-point cut in September, followed by another similar move in November, and a 25-basis-point reduction in December. Last week, the Federal Reserve hinted at a likely rate cut in September, but Chairman Powell dismissed the idea of a 50-basis-point cut.
All eyes are on Monday’s release of the ISM Services PMI for the United States to assess whether the contraction in manufacturing is spreading to the services sector, potentially signalling an ongoing recession. However, consensus among economists expects a rise in the overall index from 48.8 to 51.
The main winners in this phase of intensified global market selloff are bonds and the Japanese yen, reflecting significant movements in the interest rate market. Chris Turner, ING’s Global Head of Markets, wrote that lower US rates, more strategic Japanese FX intervention, and last week’s hawkish hike from the Bank of Japan have all contributed to the woes in USD/JPY. According to Luca Cigognini, market strategist at Intesa Sanpaolo, the yen remains strong in this environment, but the market could remain highly volatile. Goldman Sachs increased their 12-month US recession odds by 10 percentage points to 25%, but economist Jan Hatzius continues to see recession risk as limited, citing the overall soundness of the data and the absence of major financial imbalances. Danske Bank expressed a bearish outlook on EUR/USD for the second half of the year, primarily due to the belief that too many Fed rate cuts have been priced in over the next 12 months. They expect EUR/USD to steadily decline towards 1.05/1.03 in the next 6 to 12 months.