Global Stock Markets Plummet Amid US Recession Fears

Stock markets around the world took a sharp dive on Monday amid growing concerns that the US economy may be on the brink of a recession. The UK’s FTSE 100 was down over 2% in early trading, while the FTSE 250 fell more than 3%. Similar declines were seen across Europe, with significant drops in France, Germany, Portugal, and Spain.

The steep sell-off followed even more drastic losses in Asia earlier in the day, with expectations of further falls in the US when markets open later. Japan’s Nikkei 225 saw its biggest drop since “Black Monday” in October 1987, plummeting over 12% by the close on Monday. South Korea’s Kospi index fell more than 9%, and Taiwan’s Taiex exchange slipped by 8.4%.

Markets in Singapore, Indonesia, Thailand, and the Philippines also experienced significant drops, falling around 2% to 3%. The magnitude of the sell-off prompted some exchanges to trigger circuit breakers, halting trading for 20 minutes to stem the declines.

Triggered by Weak US Jobs Data

The global market turmoil was sparked by unexpectedly weak US jobs data released on Friday. Only 114,000 jobs were created in July, far below the 175,000 forecasted by Wall Street. This was the weakest job growth since December last year and the second weakest since the start of the COVID-19 pandemic in March 2020.

The disappointing jobs report came on the heels of the US Federal Reserve’s decision last Wednesday not to cut interest rates, which have been held steady at 5.25% to 5.5% since July last year. Markets now anticipate a rate cut in September.

Increased Recession Fears

Economists at Goldman Sachs have increased their estimate of the likelihood of a US recession to 25%, up from a previous estimate of 15%. Concerns are also being stoked by worries over China’s economic strength and several weak earnings reports from major tech firms last week, as investor optimism over potential returns from AI investments wanes.

Global Impact and Market Reactions

Fears of a possible US recession, coupled with ongoing tensions in the Middle East, have also led to a drop in oil prices. Brent crude slipped by over 1.2% to just under $76 per barrel on Monday morning.

In Australia, the share market suffered its worst day since the onset of the pandemic, with the S&P/ASX200 index down 3.7% to 7,649 at the close. The losses over the last two trading days amount to $160 billion, with more than $105 billion shed on Monday alone. The sell-off was replicated across Asia, with risk assets, including equities and certain currencies like the Australian dollar, all down, while safe-haven assets like bonds rallied.

Japanese stocks were particularly hard hit, recording one of their worst daily sell-offs, comparable to the Black Monday crash of 1987. The Nikkei share average has dropped 15% over three sessions.

Economic Indicators and Market Sentiment

The volatile conditions erupted last week after the US Federal Reserve indicated that interest rates might soon be cut. Initially seen as a stimulus for shares, this led to a sharp rally. However, gains quickly evaporated as investors began interpreting the impending rate cuts as a sign of underlying economic weakness. This view was reinforced by Friday’s weak jobs data, which saw the unemployment rate rise to 4.3%, the highest level in nearly three years. The data triggered the Sahm rule, a recession indicator signaling that a recession is underway.

The recent stock market falls have ended a period of strong gains led by chip maker Nvidia and the broader tech sector. While the ASX plunge has been driven by the US, local factors such as an impending Reserve Bank interest rate decision could also start to influence the market. Historically, stock markets have tended to rally during election cycles dominated by populist spending measures. However, the current economic landscape presents a challenging environment for investors worldwide.

As the global economic outlook remains uncertain, investors and market participants brace for continued volatility and potential downturns in the coming weeks.

Richard Wells
Financial Desk