By the end of Monday’s trading session, global and Arab stock market indexes continued their downward trajectory as fears of a potential recession grew in the United States (U.S.) following weak economic data. This was further compounded by mounting concerns over the Federal Reserve (Fed)’s delay in intervening to support the economy by lowering interest rates, as well as disappointing business outcomes for major companies, fueling the ongoing geopolitical situation.
Concerns over U.S. economic slowdown
According to analysts, concerns about a slowing U.S. economy appear to be at the forefront of the landscape after job growth slowed sharply in July, and investors are worried that the Fed has moved too slowly and will need to play catch-up with rate cuts.
Disappointing U.S. jobs report
The U.S. employment data showed that job creation slowed by more than expected in July, with the unemployment rate rising to its highest level since late 2021, according to government data published on August 2. This sparked calls for lower interest rates.
The world’s largest economy created 114,000 jobs last month, a figure that reflects a decline from the 179,000 jobs created in June, according to the Ministry of Labour. The unemployment rate rose to 4.3 percent, the highest since October 2021, based on the government data.
Historic losses in global equity markets
This data triggered a sudden state of global panic that began overnight on Sunday, leading to the depreciation of stocks, currencies, and even cryptocurrencies, raising the prospect of a wider slowdown on the horizon, some analysts cautioned.
Global equity markets erased more than $3 trillion in value due to the massive losses they suffered as the week began trading.
The fear index rose to 4-year highs, more than 120 percent higher than the previous Friday.
In Japan, the Nikkei 225 index recorded the worst daily performance since 1987, losing about $620 billion in market value, which certainly does not include all Japanese stocks, most of which suffered losses.
The MSCI Emerging Markets Index also lost $504 billion, and the European Stoxx 600 saw losses of more than $300 billion.
As U.S. markets opened to losses, the market value of the world’s top 9,143 companies lost more than $2 trillion, with the total value dropping from $103.8 trillion to $101.8 trillion.
The current stock losses are the largest since the COVID-19 pandemic and may approach the levels seen during the 2008 global financial crisis.
Driving factors behind selloff
The global financial market trades were dominated by red, resembling historic collapses, as Japan’s stock exchange indexes fell to their lowest level since 1987. This was soon followed by a downturn in world currencies, Asian, Arab, and European markets, as well as harsh losses in oil and cryptocurrencies, leading to questions about the causes of this crisis.
Global equity indexes fell on Monday, with the dollar and the euro both declining by 2 percent against the Japanese yen. Major equity indexes fell at the opening, with declines of 2.42 percent in Paris, 1.95 percent in London, 2.49 percent in Frankfurt, 3.05 percent in Amsterdam, 3.31 percent in Milan, 2.97 percent in Zurich, and 2.79 percent in Madrid.
These rollbacks are attributed to three major reasons: the weak U.S. jobs report, which sparked fears of a recession in the world’s largest economy; the Bank of Japan’s surprise interest rate hike by more than expected at 25 basis points; and the escalating geopolitical tensions in the Middle East.
Moreover, these factors pushed investors’ fears to high levels, sparking a selling frenzy in global financial markets to avoid risk, and a rush toward gold as a safe haven.
Asian stock markets hit hard
In Asian stock markets, the decline in indexes was more pronounced on Monday, particularly in Tokyo, whose main index, Nikkei, fell by 12.4 percent, marking its worst historic decline since the stock market crash in October 1987. The broader Topix index fell 12.23 percent. Taiwan’s stock exchanges fell by more than 8 percent, and Seoul by more than 9 percent.
Chinese stock markets fell more moderately, with the Hong Kong’s Hang Seng index declining 2.13 percent in recent trading. The Shanghai Composite Index fell 1.54 percent, and the Shenzhen Index declined 1.85 percent.
The immediate reason for the move away from risk appears to be the unexpected interest rate hike announced by the Bank of Japan last Wednesday. This monetary tightening after years of negative interest rates, coupled with slowing U.S. economic activity, has significantly accelerated the yen’s rise, also supported by the Central Bank of Japan’s interventions in the foreign exchange market.
Bank, tech stocks under pressure
Bank stocks have been particularly under pressure. In Japan, Mitsubishi UFJ Financial Group fell by 13.5 percent, Sumitomo Mitsui Financial Group by 14.6 percent, Mizuho by 12.8 percent, and Nomura by 18.59 percent. In Europe, UniCredit Bank fell by 6.54 percent, Intesa Sanpaolo in Milan by 5.57 percent, Deutsche Bank in Frankfurt by 5.12 percent, Société Générale in Paris by 5.05 percent, and Barclays in London by 5.08 percent.
Technology sector stocks also fell markedly. In Amsterdam, ASML fell 4.46 percent, and BE Semiconductor Industries declined by 5.17 percent. In Frankfurt, Infineon fell 2.34 percent. In Paris, STMicroelectronics fell by 5.10 percent, and Capgemini by 2.93 percent.
Analysts weigh in on U.S. economic health
According to analysts, by most measures, the U.S. economy remains in a strong state, with Americans continuing to spend, the services sector growing, the stock market remaining high throughout the year, and not far from the all-time highs they have recently recorded.
The U.S. central bank last week left borrowing costs unchanged, saying it needed more evidence that inflation was reliably under control. Many expected the Fed to begin cutting interest rates at its next meeting in September.
On Tuesday, Reuters reported that Japan’s Nikkei index had risen in early trading on the Tokyo Stock Exchange.
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