Key points:

  • The Nikkei index posted a record drop, moving into the “bear market” category, the STOXX 600 index also fell, with the banking sector particularly hard hit.
  • Some experts believe that this is a natural correction after the previous period of rapid growth.
  • The strengthening of the yen and the narrowing of the yield gap between Japan and the US led to a sell-off in Japanese assets.

Global stock markets fell sharply on Monday, as fears grew that the U.S. economy could be heading into recession. Investors ditched risky assets in droves, opting for safer options. At the same time, expectations grew that regulators would cut interest rates to boost economic growth.

What’s happened?

Japan’s Nikkei index posted a particularly steep decline, falling 12%. It was its worst performance since October 1987, and it hit a nine-month low, moving into a bear market.

Europe’s STOXX 600 index also lost ground, falling 3%. Bank stocks posted an even steeper decline, falling more than 4.5%. U.S. stock futures also fell sharply, signaling investors are bracing for further sell-offs on Wall Street.

The Japanese yen hit a seven-month high, reflecting increased demand for safe havens amid heightened uncertainty in financial markets.

The current decline is unlikely to signal a deep recession

Here’s what financial analysts think about this event.

Sami Chaar, chief economist at Lombard Odier in Geneva, expressed concern about the current economic situation. In his opinion, the risk of recession is the main factor influencing prices, but geopolitical factors such as the expected retaliatory measures of Iran and Hezbollah to Israeli military actions should not be ignored. Chaar emphasized that despite the negative data published on Friday, the US economy is still showing resilience, and it is possible that positive employment growth figures will be recorded next month.

Mohit Kumar, chief European economist at Jefferies, attributes the recent market volatility to asset pricing. He believes that the current correction is a normal reaction to the previous period of strong growth, especially in the technology sector. Kumar stressed that the current situation doesn’t indicate the beginning of an economic downturn.

Ben Bennett, head of investment strategy for Asia at LGIM in Hong Kong, notes a decrease in investor interest in assets that showed strong performance in the first half of the year. In his opinion, such a sharp market reaction to the Bank of Japan rate hike and the US employment data looks somewhat exaggerated and is likely explained by traders’ desire to take profits amid increased volatility.

Thus, all three experts agree that the current correction in financial markets is a natural reaction to the previous period of growth and doesn’t necessarily signal the beginning of a deeper crisis.

The yen’s role in the market’s decline

Richard Kay, a portfolio manager at Comgest in Tokyo, said the sudden narrowing of the yield gap between Japan and the US had led to a partial normalisation of the yen. This had triggered a fair sell-off of misguided foreign speculative capital flows into Japanese banks and yen manipulation, which is the main reason for the current moves in the market. Overall, not just the currency but the entire asset trading in Japan, which has dominated the market for the past two years, is returning to normal. This is good news for serious investors, who make up the majority of market participants, who have been sitting on the sidelines during the recent speculative moves.

Kyle Rodda, a senior financial market analyst at Capital.com in Melbourne, said global markets were in decline, with significant declines across the board. The rapid move in the yen is putting pressure on Japanese stocks and is also causing a major carry trade, in which investors used yen loans to buy other assets, mainly US technology stocks, to unravel.