On Monday, global stock markets experienced a severe downturn as investors grew increasingly concerned about the Federal Reserve’s adequacy in supporting the slowing U.S. economy. This apprehension drove a significant influx into bonds, reflecting a broad shift towards safer investments. Japanese equities plummeted for the third consecutive day, with the Topix index falling over 7%, while the yen appreciated by more than 1% on expectations of further interest rate hikes by the Bank of Japan following last week’s increase. Similarly, Korean and Australian stock markets declined, and U.S. futures dropped by over 1.5%. The heightened uncertainty regarding a potential hard landing for the U.S. economy fueled a rally in Treasuries, pushing yields to their lowest level in over a year.
The market’s rapid pivot away from the belief that the Federal Reserve could engineer a soft economic landing has been stark. Recent data revealed one of the weakest U.S. nonfarm payroll reports since the pandemic, and the unemployment rate unexpectedly rose above the Fed’s year-end forecast, signaling a potential recession.
Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore, described the situation as a “conspiracy of ‘risk off’ triggers,” noting that the combined factors of anticipated Bank of Japan tightening and perceived delays by the Fed are undermining investor risk appetite.
The Japanese market’s three-day drop has now exceeded 20%, marking a bear market and representing the worst losses since the 2011 tsunami and Fukushima disaster. Following a rally in Treasuries on Friday, Japan’s 10-year bond yield fell to its lowest level since April, decreasing by up to 17 basis points to 0.785% on Monday. Similar declines were observed in New Zealand yields, while Australian bonds remained unchanged due to a bank holiday before the Reserve Bank of Australia’s policy meeting.
In the commodities sector, oil prices extended their decline amid reports of potential Iranian strikes on Israel in response to recent assassinations of Hezbollah and Hamas officials. Saudi Arabian and Israeli stocks fell by more than 2% on Sunday, exacerbating losses from Friday’s Wall Street downturn.
The escalating Middle Eastern conflict threatens to add further volatility to the markets as investors brace for a turbulent second half of the year. A key measure of bond market volatility has risen, and the VIX Index—Wall Street’s fear gauge—spiked to its highest level in nearly 18 months.
Concerns are mounting that the Federal Reserve’s decision to maintain interest rates at a two-decade high could exacerbate economic slowdowns. Market expectations now anticipate a significant rate cut of over one percentage point in 2024, with a growing likelihood of a 50-basis point reduction in September, as indicated by Bloomberg data.
Brian Rose, a senior U.S. economist at UBS Group AG, commented, “Given the unemployment rate and core PCE inflation diverging from the Fed’s forecasts, we foresee the need for more aggressive action by the Fed.” He revised the forecast to include a 50-basis point rate cut in September, followed by additional cuts in November and December.
Despite these expectations, bond traders have repeatedly misjudged interest rate movements since the end of the pandemic, often overshooting predictions and reacting to unexpected economic developments. In late 2023, bond prices surged on expectations of an impending Fed easing, only to reverse as economic strength persisted.
In Asia, traders are also monitoring China’s economic situation closely, following the government’s new focus on boosting consumer spending amid weak domestic demand. Upcoming data on private Caixin China services and composite activity are expected later Monday, following an unexpected contraction in the manufacturing PMI last week.
