In a rollercoaster start to the week, Asian markets plummeted while bonds soared, as looming recession fears in the U.S. pushed investors away from risk assets.
As the economic storm brews, bets are on for rapid rate cuts to salvage growth.
Investors, spooked by the recession specter, drove Nasdaq futures down 2.27% and S&P 500 futures by 1.41%.
European futures followed suit, with EURO STOXX 50 dipping 0.6% and FTSE slipping 0.2%. Japan’s Nikkei, battered by a 5.5% drop, hit seven-month lows, its worst three-day loss since the 2011 crisis.
In stark contrast, Chinese blue chips bucked the trend, inching up 0.4%, buoyed by an uptick in the Caixin services PMI to 52.1. However, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.0%.
Bond yields mirrored the market jitters. Japanese 10-year yields plunged 17 basis points to 0.785%, the lowest since April, as hopes for a Bank of Japan hike dwindled.
The U.S. Treasury yields also tumbled, with 10-year yields reaching 3.723%, the lowest since mid-2023.
Two-year yields fell to 3.818%, a sharp drop that could invert the yield curve, historically a recession harbinger.
A dismal July payroll report has markets betting nearly 70% on the Federal Reserve cutting rates in September, potentially by 50 basis points.
Futures suggest a substantial 115 basis points cut in the 5.25-5.5% funds rate this year, with rates potentially falling to 3.0% by the end of 2025.
Goldman Sachs, in a note, raised its 12-month recession odds by 10 percentage points to 25%.
The firm expects quarter-point cuts in September, November, and December, contingent on job growth recovery in August.
However, a weak August report might prompt a steeper 50bp cut in September.
JPMorgan presents an even grimmer outlook, assigning a 50% chance of a U.S. recession.
Economist Michael Feroli predicts a 50bp cut in both September and November, with the potential for inter-meeting easing if data deteriorates further.
Eyes are now on the ISM non-manufacturing survey for a read on service sector employment, expected to rebound to 51.0 after June’s slump to 48.8.
Earnings from industry giants Caterpillar and Walt Disney, along with healthcare stalwarts like Eli Lilly, will shed more light on consumer and manufacturing health.
The sharp fall in Treasury yields overshadowed the U.S. dollar’s safe-haven status, dragging it down 1% on Friday and another 1% on Monday against the yen, settling at 144.99.
The euro held steady at $1.0920, while the Swiss franc surged, pushing the dollar to six-month lows at 0.8533 francs.
“The shift in expected interest rate differentials against the U.S. has outweighed the deterioration in risk sentiment,” noted Jonas Goltermann, deputy chief markets economist at Capital Economics.
He expects the dollar to rebound if the recession narrative takes hold, driven by renewed safe-haven demand.
In commodities, gold slid to $1,934 an ounce as investors sold off to cover other losses. Cryptocurrencies followed, with Bitcoin and Ether tumbling.
Oil prices rebounded amid Middle East conflict fears, with Brent crude rising 27 cents to $77.08 a barrel and U.S. crude up 23 cents to $73.75.
As markets navigate these turbulent waters, the message is clear: brace for impact, but keep an eye on the horizon. Business leaders and investors alike must stay informed and adaptable in these uncertain times.
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