Wall Street faced a significant downturn as global stock markets experienced a sharp sell-off, driven by escalating fears of a U.S. recession. Japanese shares were hit particularly hard, with the Nikkei average plummeting 12.40%—its steepest one-day drop since October 1987—and the broader Topix losing 12.48%. This decline was mirrored across Europe, with major indices such as Germany’s DAX, France’s CAC 40, and Britain’s FTSE all falling more than 2%.
The sell-off was exacerbated by thinly-traded summer markets, making them more susceptible to large swings. Investors’ flight from risk was prompted by several factors: the Bank of Japan’s move into a hiking cycle for the first time in two decades, high tech stock valuations, and a soft U.S. payroll report. The CBOE volatility index, often referred to as Wall Street’s fear gauge, spiked to 53.55, its highest since March 2020.
In Europe, the STOXX 600 index dropped to its lowest point since February, reflecting widespread pessimism. Safe-haven assets like the yen and Swiss franc surged as investors unwound risky positions to cover losses. Treasury bonds were in high demand, pushing the yield on the U.S. 10-year note down to 3.721%, the lowest since mid-2023.
The weak July payrolls report increased the likelihood of the Federal Reserve cutting rates, with markets pricing in a 78% chance of a September rate cut and further reductions through the end of the year. Analysts at Goldman Sachs and JPMorgan differed in their recession outlooks, with Goldman estimating a 25% chance and JPMorgan a 50% probability.
The dramatic fall in Treasury yields diminished the U.S. dollar’s appeal as a safe haven, causing it to decline against a basket of major currencies. The yen and Swiss franc saw significant gains, reflecting the market’s risk aversion.
Commodity markets also felt the impact, with gold prices falling by 2.3% and oil prices declining due to concerns about global demand. Brent crude dropped to $75.58 per barrel, and U.S. crude fell to $72.15 per barrel, as worries about the Middle East conflict were overshadowed by broader economic fears.
As the week progresses, investors will closely watch upcoming earnings reports from major companies like Caterpillar, Walt Disney, and Eli Lilly for further insights into the health of the economy. The ISM non-manufacturing survey, expected to show a rebound, will also be scrutinized for signs of economic strength.
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