The Nikkei 225, Japan’s benchmark stock index, surged 11% in the past 24 hours, starting today’s trading at $34,695.
This follows a period of market declines in Europe and Wall Street and represents a rise of nearly 2% from its highest daily peak.
Despite this increase, it has not fully recovered from its massive loss of over 4,400 points, a 12.4% drop, marking its worst daily decline since 1987 and bringing it to its lowest level in seven months amid rising interest rate expectations in Japan.
Asian stocks also fell by 8%, following losses on Wall Street.
These declines are part of a global selling wave that began last week. From my perspective, this was the first opportunity for Tokyo traders to react to last Friday’s report showing that U.S. job growth slowed more than expected last month.
This was the first weaker-than-expected U.S. economic data, raising concerns that the Federal Reserve may have overly tightened its monetary policy with high interest rates to control inflation.
I believe that recent market declines might be short-term, though the losses remain significant. The South Korean KOSPI index fell by 8.8%, and Bitcoin dropped to below $54,000 from over $61,000 last Friday. Even gold, typically a haven during crises, fell by about 1%.
I believe this is partly due to traders questioning whether the damage is severe enough for the Federal Reserve to cut interest rates in an emergency meeting before its scheduled decision on September 18. This is especially relevant given the drop in the two-year Treasury yield, which briefly fell below 3.70% from 3.88% late Friday and from 5% in April, before recovering slightly to 3.89%.
From my perspective, expectations for interest rate cuts between meetings may be overstated and unrealistic. Such cuts are usually reserved for emergencies, like the COVID-19 crisis, and with an unemployment rate of 4.3%, it doesn’t currently seem to warrant an emergency response.
The U.S. economy is growing at a healthy pace, the U.S. stock market remains robust this year, and a recession is still far from certain. Additionally, the Federal Reserve has been clear about its tightening policies since it sharply raised rates in March 2022. Excessive easing could add more pressure to the economy, strengthen inflation, and cause further issues.
In reality, the chances of a recession within the next twelve months might have increased following last Friday’s job report. However, the odds remain at only 25%, up from 15%, partly because the data still looks generally good and there have been no major financial disruptions in the markets. This might support a medium-term rebound for the Nikkei 225.
Recent declines on Wall Street might have been mere corrections in a stock market that hit record highs this year, partly due to the hype around artificial intelligence technology, with prices having risen too rapidly and excessively relative to corporate earnings.
The only way stocks might seem less expensive is either through lower prices or increased earnings. With high expectations for earnings growth, this could support a rebound in markets worldwide, including the Nikkei 225 in the near and medium term.
The Bank of Japan’s recent move to raise its key interest rate from near zero could help boost the value of the yen but may also force investors to exit trades where they borrowed money at nearly zero cost in Japan and invested elsewhere globally. This could increase pressure on stock markets and present some obstacles to a near-term rebound. It’s also worth noting that the Bank of Japan has retreated from plans to raise interest rates further in the future, indirectly affecting global stock market volatility and resulting in a notable weakening of the yen against the dollar.
Treasury yields have recently reduced their losses following a report indicating that U.S. service sector growth was slightly stronger than expected. However, stocks of companies closely tied to economic strength experienced sharp losses due to fears of economic slowdown. Small-cap stocks in the Russell 2000 index fell by 3.3%, erasing the previous market rebound.
From my perspective, what worsened the situation for markets was the drop in shares of major tech companies after Apple, NVIDIA, and several other large tech stocks, known as the “Magnificent Seven,” drove the S&P 500 index to record lows this year despite rising interest rates.
This, in my view, caused a shift in momentum for major tech stocks last month due to concerns that their stock prices had risen to excessively high levels and that future growth expectations had become difficult. Moreover, a series of disappointing earnings reports, starting with updates from Tesla and Alphabet, added to the pessimism and supported these corrective declines.
Beyond all this, heightened geopolitical tensions in the Middle East could lead to sharp fluctuations in oil prices, and increasing market concerns, while upcoming U.S. elections might lead to further disruption. Sharp stock price fluctuations could also impact the elections themselves. A looming recession might put Vice President Kamala Harris in a weakened position, but slower growth could also further reduce inflation and force former President Donald Trump to shift from focusing on rising prices to finding ways to support economic recovery.
Ultimately, the focus remains on job data as it drives consumer spending, which constitutes the largest part of the U.S. economy. Unemployment rate figures will be crucial in the coming period, especially ahead of the Federal Reserve’s September meeting.
Leave a Comment