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Japanese stocks plunged on Monday, sending the Nikkei 225 index down almost 13 per cent in its biggest-ever one-day drop as global markets were rattled by the prospect of a US recession.
In a rout that produced declines in other Asian markets, Japan’s broad Topix was down as much as 11 per cent, wiping out gains for the year. The Nikkei 225, which on Friday suffered its biggest one-day points fall since the 1987 crash, was down more than 4,600 points.
Trading in both Topix and Nikkei futures were suspended as the selling frenzy continued into the afternoon, hitting “circuit breaker” levels that automatically stop trading. In Korea, similar circuit breakers were triggered for the first time in four years.
Futures markets indicated the huge sell-off in Japan was likely to continue in Europe and the US. Investors are prepared for renewed volatility on fears that the Federal Reserve has been too slow to respond to signs the US economy is cooling and may be forced to cut interest rates.
Traders in Tokyo said the selling was part of a major correction and de-risking move by global funds. But Tokyo equities were also hit by a yen that has strengthened by about 9 per cent since mid July.
“The Japanese market is seen by global investors as a warrant on global trade,” said the Japan head of one global pension fund. “So if you are in severe de-risking mode, as a lot of investors are at this point because of US recession fears and geopolitics, it makes sense you take profits in a Japanese market that has done very well so far this year.”
The sell-off in Japan was echoed across other Asian markets. South Korea’s Kospi benchmark was down more than 4 per cent in early morning trading, while the Australian S&P/ASX 200 fell almost 3 per cent. Taiwan’s main stock market index declined more than 6 per cent.
Weak US jobs data on Friday has piled further pressure on a market already buckling under an investor exodus from expensive technology stocks, with the Nasdaq index falling into correction territory last week and haven Treasuries rallying sharply.
“The narrative has literally changed overnight,” said Torsten Slok, chief economist at Apollo. Investors were weighing up whether to treat Friday’s jobs number as a statistical quirk or whether the US was “now in a more severe slowdown period”, he added.
The global turbulence extended to the crypto market, with the price of bitcoin falling more than 8 per cent to $54,000 on Monday while the price of ether, another cryptocurrency, has fallen almost 17 per cent.
The Fed kept rates on hold when it met last week, but market reaction after the jobs data indicates that investors believe the central bank may have made a mistake in not cutting rates.
JPMorgan economists joined the growing chorus of Wall Street strategists over the weekend 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, wrote on Saturday that he had turned “bullish on volatility” given investors’ newfound uncertainty about the path of interest rates and summer illiquidity.
The Vix index of expected US stock market turbulence — commonly known as Wall Street’s “fear gauge” — climbed as high as 29 points on Friday, the highest since the US regional banking crisis in March last year.
The tech-heavy Nasdaq Composite finished the week 3.4 per cent lower and has declined more than 10 per cent since July’s all-time high. Treasuries rallied, with the yield on the US 10-year hitting its lowest level since December at 3.82 per cent.
On Saturday, Warren Buffett’s Berkshire Hathaway disclosed that it had halved its position in Apple in the second quarter, while raising its cash position to a record $277bn and buying Treasuries.
Investors are betting the Fed will lower borrowing costs by more than a full percentage point by the end of the year to counter a weakening economy.
“I think interest rates are too high,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. While the economy was still “relatively strong”, the Fed needed to get rates to around 4 per cent “sooner rather than later”, Rieder said.
However, Diana Iovanel, senior markets economist at Capital Economics in London, said equity “valuations are still far from pointing to an economic cataclysm”.
She added: “Renewed fears of a US recession have increased the chances of additional rate cuts from the Fed. But we don’t think that the US economy will stand in the way of an equity rally for much longer.”
Additional reporting by Philip Stafford and George Steer in London and Harriet Clarfelt and Kate Duguid in New York
