Stock markets worldwide were under pressure on Monday, with the Japanese stock market’s price loss particularly notable. Analysts said many factors are at play. Despite the turbulence, market experts advise caution, suggesting neither panic nor immediate buying opportunities. ‘There is no reason to panic, but it is also not a time to buy.’
In Europe, Amsterdam’s AEX, heavily exposed to tech stocks, dropped by 4 percent in the afternoon. France’s CAC 40 declined by 2.7 percent, and Germany’s DAX fell by 3.4 percent. Across the Atlantic, the S&P 500 lost over 3 percent, while the Nasdaq dropped around 4 percent.
Asia faced the harshest blows, with Japan’s Nikkei index plummeting more than 12 percent. South Korea and Taiwan markets also saw record losses of over 8 percent.
Edmond de Rothschild’s chief strategist, Frank Vranken, described the situation as a “bloody Monday for stock markets.”
Recession worries intensify
Weak U.S. job figures have fueled recession fears. The U.S. unemployment rate’s rise to 4.3 percent indicates a potential recession, according to the Sahm rule. Vranken noted that major investors have increased their recession expectations, with Goldman Sachs raising the probability of a U.S. recession from 15 percent to 25 percent.
Van Lanschot Kempen’s chief economist, Luc Aben, expressed surprise at the resurfacing recession concerns in the U.S. and Europe. While he acknowledges the low growth rate in Europe, he remains uncertain if it will lead to a recession.
JP Morgan Asset Management strategist Vincent Juvyns deemed Monday’s losses “exaggerated,” advising against panic but also cautioning against buying. He expects continued volatility in the coming days.
Renco van Schie, co-founder and CIO of ValueEdge, highlighted the resurgence of recession fears. Despite positive sentiment driven by AI and technology, underlying economic conditions have been weak. Van Schie noted that ValueEdge had already reduced their equity exposure and plans to let markets stabilize before buying.
Interest rate concerns
Recession fears are compounded by downgraded expectations for AI’s impact on corporate growth. Intel’s announcement of 18,000 job cuts added to the anxiety, though Aben considers it a company-specific issue.
Investors are worried that the Federal Reserve has delayed interest rate cuts too long. The market expects the Fed to begin easing rates soon, with a projected 125 basis point reduction by year-end, as indicated by CME’s FedWatch tool.
Yen carry trade unraveling
The yen carry trade, a popular strategy of borrowing in Japan at low interest rates to invest elsewhere, is losing appeal. Japan’s central bank’s recent rate hike has made this strategy less lucrative. Aben noted that investors are unwinding their yen short positions, leading to a significant yen appreciation.
Cardano’s strategist Corné van Zeijl observed that the rapid unwinding of carry trades is causing market turmoil. The extent of these trades is unclear, making future predictions difficult.
Today’s Asset Management partner Cees Smit questioned the continued relevance of the carry trade strategy, given its long history and multiple interest rate changes.
Juvyns reassured that Japan’s central bank will remain flexible despite rate hikes, maintaining relatively low interest rates and sustaining carry trades.
Heavy tech exposure
Vranken attributed Monday’s sharp losses to substantial tech sector holdings. He pointed out that significant sell-offs in big tech have exacerbated market declines. Notably, Warren Buffet’s recent sale of half his Apple shares and Bank of America shares, leaving him with $280 billion in cash, may signal further selling pressure from retail investors.
Van Zeijl argued that Monday’s correction is a normal market response, citing dwindling consumer savings and government borrowing limits.
Overall, several markets may enter correction or bear market territory. Vranken warned of a potential bull market reversal, while Van Schie predicted continued volatility, particularly with the U.S. elections approaching.