Japanese stocks witnessed an unprecedented plunge on Monday with the Nikkei 225 index dropping almost 13% in its largest-ever single-day decline, sending shockwaves through global markets and raising concerns about a looming US recession.
The broader Topix index also fell by up to 11%, erasing all its gains for the year.
By Friday, the Nikkei 225 had already experienced its most significant one-day points fall since the 1987 crash, plummeting more than 4,600 points.
The market frenzy led to the suspension of trading in both Topix and Nikkei futures as they hit “circuit breaker” levels, which are designed to halt trading during extreme market volatility.
This phenomenon was not isolated to Japan; similar circuit breakers were triggered in South Korea for the first time in four years.
Futures markets indicated that the sell-off in Japan could extend to Europe and the US, with investors bracing for renewed volatility driven by fears that the Federal Reserve might have been too slow in addressing signs of a cooling US economy, potentially necessitating interest rate cuts.
Bill Ackman, CEO of Pershing Square, said,
The Federal Reserve was too slow to raise rates. Now it is too slow to lower them.
Sell-off to de-risk?
Traders in Tokyo attributed the sell-off to a significant correction and de-risking move by global funds.
The Japanese market, often seen as a bellwether for global trade, became a target for profit-taking amidst the de-risking trend.
The yen’s strength, having surged by about 9% since mid-July, further compounded the impact on Tokyo equities.
“The Japanese market is seen by global investors as a warrant on global trade,” said the head of a global pension fund in Japan as quoted by the Financial Times.
So if you are in severe de-risking mode, as many investors are now due to US recession fears and geopolitics, it makes sense to take profits in a Japanese market that has performed well this year.
Ripple effects across Asia and the world
The sell-off in Japan was echoed across other Asian markets.
South Korea’s Kospi benchmark dropped over 4% in early trading, while Australia’s S&P/ASX 200 fell almost 3%.
Taiwan’s main stock market index declined more than 6%. Weak US jobs data from Friday exacerbated market pressures, as investors continued to flee from expensive technology stocks.
In India, the BSE Sensex was trading 2.91% lower, down 2,358 points, while the Nifty50 was trading 2.88% lower at 11:43 am, down 712.50 points.
The Nasdaq index fell into correction territory, and haven Treasuries rallied sharply
Shifting investor sentiments and future implications
The Vix index, a measure of expected US stock market turbulence known as Wall Street’s “fear gauge,” spiked to 29 points on Friday, the highest level since the US regional banking crisis in March of the previous year.
The tech-heavy Nasdaq Composite ended the week 3.4% lower and has declined more than 10% since July’s all-time high.
Treasuries rallied, with the yield on the US 10-year note hitting its lowest level since December at 3.82%.
On Saturday, Warren Buffett’s Berkshire Hathaway revealed it had halved its Apple holdings in the second quarter, raised its cash position to a record $277 billion, and bought Treasuries.
The recent turbulence extended to the cryptocurrency market, with Bitcoin’s price falling more than 8% to $54,000, and Ether’s price dropping nearly 17%.
Investors’ concerns were heightened by the Federal Reserve’s decision to keep rates on hold, leading to speculation that the central bank might have erred by not cutting rates sooner.
JPMorgan economists joined other Wall Street strategists over the weekend in calling for the Fed to reduce rates by 0.5 percentage points at its next two meetings.
Srini Ramaswamy, JPMorgan’s managing director of US fixed income research, expressed a “bullish” outlook on volatility given the newfound uncertainty around interest rates and summer market illiquidity.
Madhavi Arora, Lead Economist, Emkay Global Financial Services, said,
A combination of higher long-term yields in Japan, an unattractive hedge ratio for Japanese corporates on overseas investments and a stronger yen, driven by other factors more than a hawkish BoJ will cause a repatriation of capital into Japan. This may cause the global bond term premia to rise.
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