Equity Market Sell-Off Worsens

Global equity markets have suffered further losses this morning following Friday’s sell-off.

As we looked at on Friday, the Fed’s decision to hold rates unchanged last Wednesday got many concerned that monetary conditions were being held unnecessarily high, raising recessionary fears across the world’s largest economy. Such fears were exacerbated when the US’ ISM Manufacturing index fell well short of expectations on Thursday and US unemployment data released on Friday pointed to a slowdown in the country’s labour market. According, analysts at Goldman Sachs for example raised their forecasts of a recession in the US by 10 percentage points to 25%

Alongside a string of corporate earnings reports which signalled headwinds for some of America’s largest companies, pressure mounted on equites, particularly those in the tech sector. (On Friday, for example, Reuters reported that Berkshire Hathaway halved their stake in Apple).

In the US, the tech heavy Nasdaq has now fallen more than 10% from July’s record highs, as Nasdaq futures fell 4.7%. This comes as the S&P 500 futures dropped 12.4%.

In Japan, the TOPIX index sank over 12% over Monday’s session as the Nikkei 225 index fell 12.4%. Such was the scale of the sell-off – the worst single day since Black Monday in 1987 – both indexes erased nine months of gains.

Japanese stocks have been under particular pressure following the BoJ’s decision to raise rates to 0.25% last week and hawkish rhetoric around the prospect of further hikes.

Stocks in the financial and tech sectors were subject to considerable pressure with Mitsubishi UFJ closing close to 18% lower as Sumitomo Mitsui and Tokyo Electron closed 15.2% and 18.4%, lower respectively.

The Nikkei 225 Index is now trading around 20% lower on the week and 24% lower on the month.

On Friday, the dollar came under pressure following the release of data which gave further indication of a slowdown in the US labour market. This came as the nonfarm payroll print showed 144,000 new being posted over the course of the month of July, missing expectations of 175,000. This came well below the rolling year average of 215,000 and marked the lowest figure in three months.

Meanwhile, the rate of unemployment also rose unexpected to 4.3%, its highest since October 2021.

The slowdown in the US labour market raised expectations of a rate cut from the Fed, such that markets are now implying that there are three 25bps cuts in the price over the next two meetings. This effectively means that a 50bps cut has been priced in for either the September or November meeting.

Market attention will now turn to the release of PMI figures across the world with the Eurozone’s released at 08:45 ahead of the UK’s at 0930. In the US, PMI figures will also be released at 14:45 and 15:00 respectively where markets will be looking for further indication into the health of the US private sector.