Investor concerns over the health of the world’s biggest economy and the rising tensions between Israel and Iran have piled further pressure on a market already buckling under an investor exodus from high-flying technology stocks.

“I’m not expecting a bounce for a little while, because right now we have this perfect storm of the Japanese carry trade being unwound, weakness in US Big Tech and Middle East tensions,” said Seema Shah, chief global strategist at Principal Asset Management.

Japan rout

Traders in Tokyo said the selling was part of a big correction and de-risking move by global funds. But Tokyo equities were also hit by a yen that has strengthened by about 12% since mid July. On Monday, the yen soared 2.2% to ¥142.3 against the dollar.

“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.”

Trading in both Topix and Nikkei futures were suspended during the afternoon session as the selling frenzy continued into the close, hitting “circuit breaker” levels that automatically stop trading.

In Korea, similar circuit breakers were triggered for the first time in four years. Traders in Tokyo at three different brokerages said that they knew of several big hedge fund clients that had been ordered to close all their positions as losses mounted.

Australia in a ‘messy position’

The Australian share market has suffered its worst day in more than four years as rising fears of a US recession sparked global panic selling, AAP reported this evening.

The benchmark S&P/ASX200 index on Monday dropped 293.6 points, or 3.7%, to 7,649.6 – its biggest single day fall since May 2020.

That amounts to a loss of 5.81% – or $160 billion – for the local bourse over the past two days of trading, after it finished 2.11% lower on Friday.

The broader All Ordinaries dropped 311 points, or 3.81%, to 7,859.4. Not since March 2020, when markets were spooked by the outbreak of the Covid-19 pandemic, has the ASX experienced such a vicious two-day sell-off.

“The markets are in meltdown and it’s a sea of red across the world,” said capital.com analyst Kyle Rodda.

“I think we’re in a fairly messy position here,” AMP chief economist Shane Oliver told Sky News.

“It looks to me like the inflation scare we saw earlier in this year in the US and more recently in Australia, has unnecessarily delayed monetary easing.

“And now, of course, the financial markets are starting to worry about that higher risk of recession.”

Local traders joined a rout in global equities that was sparked by the US unemployment rate unexpectedly jumping to a near three-year high of 4.3% on Friday.

That triggered the Sahm rule, which holds that a recession is likely underway if the three-month average of the unemployment rate rises by half a percentage point in a year.

However, NAB senior economist Taylor Nugent says it doesn’t necessarily mean the US will enter a recession, and strong growth in labour force participation will somewhat temper the rise in unemployment.

A positive for traders out of Monday’s carnage: it is now almost certain Australia’s Reserve Bank board will not raise the cash rate at Tuesday’s meeting.

“A lot can change seemingly overnight in the world of central banks and what we’ve seen transpire over the past week certainly speaks to this,” said T. Rowe Price portfolio manager Scott Solomon.

“Markets saw a nearly 50% chance of a hike by the RBA before the end of the year get completely turned on its head, with markets now pricing nearly a 100% chance of a cut before the year is out.”

After the tech-heavy Nasdaq sank 2.43% on Wall Street on Friday, IT stocks led the way down on the ASX, down 6.61%. The remaining 10 industrial sectors were also more than 1.5% in the red.

Traders laid waste to the Big Four banks, with CBA down 5.7%, NAB falling 4.6% and ANZ and Westpac both ending 4.5% lower.

Health care stocks were the least worst hit, falling 1.8%.

Wall Street wobbles

“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 Federal Reserve kept rates on hold when it met last week, but the severity of the 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, in response to nascent signs of weakness.

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.

A sell-off which started in richly valued big-tech stocks, many of which reported earnings last week, gained wider traction after the Fed decision and jobs data.

The Nasdaq Composite has declined more than 10% 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%.

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 $277 billion (NZ$465.6b) 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% “sooner rather than later”, Reider said.

However, Diana Iovanel, senior markets economist at Capital Economics in London, argued that 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.”

© Financial Times, AAP

Written by: By Jacob Shteyman of AAP in Canberra. Financial Times reporting by Leo Lewis in Tokyo and Arjun Neil Alim in Hong Kong, Philip Stafford and George Steer in London, Harriet Clarfelt and Kate Duguid in New York.