Global financial markets are experiencing heightened volatility as investors grow anxious about recession risks in the world's largest economy and move away from riskier assets while seeking refuge in safe-haven investments.
The Japan's Nikkei 225 closed dramatically lower by 13.47% overnight, ending the session at 31,078 points, fully wiping out year-to-date gains. This drop surpasses the 11% decline witnessed in October 2008 and marks the worst single-day tumble since Oct. 20, 1987, when the Nikkei 225 index fell by 14.9%.
The negative sentiment spread to Europe, with all major indices deep in the red. The Eurozone's Stoxx 50 index dropped 3.5% to 4,475, adding to the nearly 4.6% decline from the previous week. Banks such as Unicredit, Deutsche Bank, and ING led the losses, all down between 4.5% and 6.5%.
Treasury Yields Drop, Yen Takes A Revenge
Futures on major U.S. equity indices traded sharply lower in premarket trading. Contracts on the Nasdaq 100 were down by 4.7%, and those on the S&P 500 decreased by 3.4%, with the latter on track for its worst session in almost two years.
Meanwhile, U.S. Treasury yields continued to fall, reflecting growing investor demand for safe assets and heightened bets on massive interest rate cuts.
After dropping by 50 basis points last week, the rate-sensitive U.S. two-year yields fell by a further 15 basis points on Monday, down to 3.72% - the lowest since March 2023. The 10-year Treasury yield fell by 10 basis points to 3.69%, marking the eighth straight day of lower yields and reaching the lowest level since June 2023.
Yields on long-dated 30-year Treasury notes fell by 7 basis points to 4.03%. On Friday, the iShares 20+ Year Treasury Bond ETF (NYSE: TLT) rallied by 3.1% and was up by 1.3% in premarket trading Monday.
Market expectations, as indicated by Fed interest rate futures, now fully anticipate a 50-basis-point rate cut in September, despite Fed Chair Jerome Powell's recent dismissal of this option.
Investors project the fed funds rate to be 125 basis points lower by year-end, implying a 50-basis-point cut in November and further 25-basis-point cuts in December.
The dramatic shifts in U.S. rates have benefited the Japanese yen, driven by the unwinding of the dollar's "carry trade," which had pushed the greenback to multi-decade highs against the yen last month.
The dollar-yen exchange rate fell by 3% to 142 as of 8:30 a.m. ET Monday, hitting the lowest since early January 2024 and marking the fifth consecutive session of decline.
Goldman Sachs Recognizes Ample Room To React For The Fed
Concerns about a U.S. recession have been fueled by weaker-than-expected data released last week.
A widely-followed survey showed manufacturing activity contracting more than anticipated last month, coupled with negative signals from the U.S. labor market.
In July, the U.S. economy added 114,000 nonfarm payrolls, significantly lower than the previous 179,000 and below the expected 150,000. Notably, the unemployment rate rose unexpectedly from 4.1% to 4.3%, the highest level since October 2021.
"We are hesitant to take the July jobs numbers as a new trend," wrote Goldman Sachs economists David Mericle and Manuel Abecasis. They noted that while the Bureau of Labor Statistics reported no discernible effect from Hurricane Beryl, there were indications of temporary factors affecting the labor market.
Notably, Goldman Sachs increased their 12-month U.S. recession odds by 10 percentage points to 25%.
Economists at Goldman Sachs continue to see limited recession risk, not only because overall data remains stable and there are no significant financial imbalances, but also because - as emphasized by chair Jerome Powell last week - the Fed has 525 basis points of room to cut rates and would act quickly to support the economy if necessary.
The investment bank now anticipates a 25-basis-point cut at each of the next three Fed meetings.
Oil Falls As Geopolitical Tensions Rise
Iran has indicated it does not seek to escalate conflicts but feels obliged to respond to Israel, maintaining elevated geopolitical tensions in the region.
"Iran seeks to establish stability in the region, but this will only come with punishing the aggressor and creating deterrence against the adventurism of the Zionist regime (Israel)," said Foreign Ministry spokesperson Nasser Kanaani, adding that action from Tehran is inevitable.
As Reuters reported citing Kanaani's remarks, an emergency meeting of the Organisation of Islamic Cooperation was scheduled for Wednesday at Iran's request to discuss Iran's response to the July assassination of Palestinian politician Ismail Haniyeh.