Global financial turbulence grips investors as worries over a potential recession in the world’s leading economy mount, prompting a flight from risky investments towards safer havens.
The Nikkei 225 in Japan plummeted by a staggering 13.47%, erasing all year-to-date gains and marking its most significant single-day decline since 1987, echoing memories of the severe market crash that year.
The negativity rippled through Europe, with major indices such as the Eurozone’s Stoxx 50 sinking by 3.5% amidst escalating concerns. Banking giants like Unicredit, Deutsche Bank, and ING faced losses ranging from 4.5% to 6.5%.
Plummeting Treasury Yields, Yen Surges
Precursors of further distress, futures on key U.S. equity indices saw sharp declines in premarket trading, with Nasdaq 100 contracts dropping by 4.7% and S&P 500 contracts by 3.4%, the latter hurtling towards its worst performance in almost two years.
Simultaneously, U.S. Treasury yields continued their downward spiral, mirroring investor rush to safe assets and increased expectations of substantial interest rate cuts.
After last week’s 50-basis-point plunge, the rate-sensitive two-year U.S. yields shed another 15 basis points on Monday, reaching 3.72% – marking the lowest since March 2023. The 10-year Treasury yield fell by 10 basis points to 3.69%, extending its eighth consecutive day of decline and touching a low not seen since June 2023.
Long-dated 30-year Treasury notes reported a 7 basis point drop to 4.03%. The iShares 20+ Year Treasury Bond ETF (TLT) surged by 3.1% on Friday and was up by 1.3% in premarket trading on Monday.
Graph: 2-Year Treasury Yields Plunge as Fed Rate Cut Bets Surge
Fed rate futures now predict a hefty 50-basis-point rate cut in September, despite Federal Reserve Chair Jerome Powell’s recent stance against such aggressive moves.
Forecasts point to a 125 basis point reduction in the fed funds rate by year-end, indicating a 50-basis-point cut in November and additional 25-basis-point cuts in December.
The swift change in U.S. rates has bolstered the Japanese yen, driven by the unwinding of the dollar’s “carry trade” that saw the greenback soar to multi-decade highs against the yen in recent months.
The dollar-yen exchange rate tumbled by 3% to 142, hitting lows unseen since early January 2024 and marking its fifth consecutive day of decline.
Goldman Sachs Acknowledges Room for Fed Reaction
Weakening U.S. data last week heightened concerns about a looming recession, with a pivotal survey revealing a steeper-than-expected contraction in manufacturing alongside discouraging signals from the labor market.
In July, the U.S. added 114,000 nonfarm payrolls, significantly below both the previous figure and the anticipated 150,000. Alarmingly, the unemployment rate unexpectedly rose from 4.1% to 4.3%, hitting its highest mark since October 2021.
Goldman Sachs economists David Mericle and Manuel Abecasis revealed an uptick in the 12-month U.S. recession odds to 25%, reflecting a 10-percentage point increase.
Their outlook, however, remains cautiously optimistic, citing stable overall data, absence of significant financial imbalances, and Federal Reserve’s substantial rate-cutting potential. Fed Chair Jerome Powell’s emphasis on the ample 525 basis points of room for rate reductions further supported this view.
Anticipating a series of 25-basis-point cuts at the upcoming three Fed meetings, Goldman Sachs retains a measured approach amid the escalating uncertainties.
Oil Prices Dip Amid Heightened Geopolitical Risks
Geopolitical tensions surged as Iran, amidst assurances not to instigate conflicts, expressed a need to respond to Israel, inflaming the situation in the region.
Iran’s goal of regional stability comes with a vow to retaliate against perceived aggression and establish deterrence against Israel, as articulated by Foreign Ministry spokesperson Nasser Kanaani.
A gathering of the Organisation of Islamic Cooperation, organized at Iran’s behest, is slated to address Iran’s response to the July assassination of Palestinian leader Ismail Haniyeh, further heightening geopolitical unease.
