Quick Look:
- Japanese stocks saw their steepest daily loss since 1987, with the Nikkei 225 dropping over 12%.
- Concerns about a US economic slowdown and interest rate hikes in Japan drove the market crash.
- Mixed earnings and scepticism about AI growth intensified the sell-off, impacting tech stocks heavily.
- Circuit breakers were activated in Japan and South Korea, and significant declines in global markets followed.
- Interest rate changes, yen appreciation, and global economic slowdowns are significant factors behind the volatility.
In an unprecedented turn of events, on Monday, Japanese stocks witnessed their steepest daily loss since the infamous crash of 1987. The Nikkei 225 index, a barometer of leading stocks in Tokyo, plummeted by a staggering 4,451 points. This historic drop translates to a more than 12% decline, marking its most significant one-day fall since October 1987 and pushing the index into bear market territory with a total decline of 25% since early July.
Echoes of Black Monday
The parallels with Black Monday, a day in October 1987 when global markets faced a massive downturn, are undeniable. Neil Newman, head of strategy at Astris Advisory in Tokyo, captured the sentiment perfectly, comparing Monday’s market crash to that fateful day. The root of the current turmoil lies in mounting fears of a significant slowdown in the US economy, which have led to expectations that the Federal Reserve might slash interest rates. Simultaneously, the Bank of Japan’s decision to raise interest rates to curb inflation has strengthened the yen against the US dollar, making Japanese export-dependent stocks less appealing.
Tech Stocks Take a Beating
Adding fuel to the fire, tech stocks have been battered by mixed earnings reports. This has led to growing scepticism among investors regarding the sustainability of the artificial intelligence boom. This scepticism has intensified the sell-off, creating a contagion effect. Consequently, it has spread fear of a hard landing for the US economy and a severe meltdown in Tokyo’s markets. Stephen Innes, managing partner of SPI Asset Management, highlighted the aggressive nature of this bear onslaught. He noted that the downturn appears self-perpetuating and relentless.
Trading Halts and Global Impact
The volatility in the market led to the activation of circuit breakers in Japan and South Korea, temporarily halting trading to prevent panic selling. Neil Newman noted the unusual absence of a rebound typically expected from short covering, indicating a particularly relentless downturn. The ripple effects of this crash were felt globally, with significant declines in Asian and European markets and a sharp drop in US stock futures. Nasdaq futures plummeted by 4%, while Dow and S&P 500 futures fell by 1.5% and 2.3%, respectively.
A Global Rout Unfolds
The global market turmoil did not stop there. The Stoxx Europe 600 index, the benchmark for European stocks, was down 2.5% in morning trade, hitting levels not seen since February. Mohit Kumar, an economist at Jefferies, attributed part of this dramatic movement to a necessary correction in US equities, particularly in the tech sector, which had been overbought. Asian markets also suffered, with Taiwan’s Taiex experiencing its worst day ever, down 8.4%, and South Korea’s Kospi falling 8.8%. Other significant declines included Australia’s S&P/ASX 200, down 3.7%, and Hong Kong’s Hang Seng Index, which fell by 2.3%.
Factors Behind the Volatility
Several underlying factors have contributed to this unprecedented volatility. The Bank of Japan’s recent interest rate hikes and plans to taper bond buying have spooked traders, especially those invested in export-heavy companies. A rising yen further complicates matters, forcing market participants to unwind the yen carry trade. In this popular strategy, investors borrow cheap yen to invest in higher-yielding assets elsewhere. This unwinding has led to a rapid yen appreciation, exacerbating the market’s downward spiral.
Economic Concerns Spread
The broader economic picture also paints a grim scenario. As indicated by a drop in its official manufacturing PMI, China’s economic slowdown adds to the global concerns. In the US, disappointing earnings reports from tech giants like Amazon and Intel and weak jobs data have heightened fears of an economic downturn. The Dow, S&P 500, and Nasdaq all closed lower on Friday, with the Nasdaq entering correction territory. Additionally, global oil prices have hit their lowest levels since January, and cryptocurrencies have not been spared either, with Bitcoin dropping significantly.
Monday’s market crash set off alarm bells worldwide, reminiscent of past financial crises. A confluence of factors, from interest rate changes to economic slowdowns and disappointing corporate earnings, has caused investors to brace for a tumultuous period ahead.
