Stock markets plunged on Monday, with Japanese shares at one point surpassing their 1987 "Black Monday" loss, as fears of a U.S. recession drove investors away from risk, betting that interest rate cuts would be necessary to revive economic growth.
The safe-haven yen and Swiss franc surged as crowded carry trades unraveled, sparking speculation that some investors were unloading profitable trades to raise money to cover losses elsewhere. Such was the torrent of selling that circuit breakers were triggered on stock exchanges across Asia.
Nasdaq futures fell over 4%, while S&P 500 futures fell around 3% ahead of the U.S. open following the sell-off that started in Japan and spread a sea of red across European markets.
CBOE's volatility index, known as Wall Street's fear gauge, tracking market turmoil, jumped over 30 points to 53.55, the highest level since March 31, 2020.
Japan's benchmark Nikkei average closed 12.40% lower at 31,458.42, its largest single-day rout since October 1987, while the broader Topix lost 12.48% to 2,220.91.
"There are lots of other big moves in markets but it's safe to say they wouldn't have been nearly as big if it wasn't August," said Jim Reid, global head of macro and thematic research, pointing to how thinly-traded summer markets can be roiled more easily.
The moves were grounded in reality, said Reid, pointing to the fact that the holdout dove Bank of Japan was finally in a hiking cycle for the first time in two decades, as well as to elevated tech valuations and positioning, and a soft U.S. payrolls report on Friday.
A report Friday showing hiring by U.S. employers slowed last month by much more than expected has convulsed financial markets, vanquishing the euphoria that had taken the Nikkei 225 to all-time highs of over 42,000 in recent weeks.
The shakeup began just a couple of days after U.S. stock indexes had jumped to their best day in months after U.S. Federal Reserve (Fed) Chair Jerome Powell set the stage for possible rate cuts to begin in September.
But after Friday's jobs report, worries are rising the Fed may have kept its main interest rate at a two-decade high for too long, raising risks of a recession in the world's largest economy. A rate cut would make it less expensive for U.S. households and companies to borrow money, but it could take time for the effects to boost the economy.
Until Friday, there had been relatively few huge market swings in the past year.
A bonanza around artificial intelligence technology helped drive Big Tech stocks higher, while other areas of the market held up amid rising hopes for coming rate cuts Fed. But professional investors have been warning that shakier times may be ahead given uncertainty about how quickly the Fed will cut interest rates and other big questions.
On Monday, European shares fell to near six-month lows amid a global sell-off in equities on fears of a slowdown in U.S. economic growth, with only a handful of stocks trading in the green.
The pan-European STOXX 600 index was down about 3% at 483.17 points, its lowest since Feb. 13.
Germany's DAX, France's CAC 40, Britain's FTSE and Spain's IBEX 35 all fell more than 2%.
Treasury bonds were in demand, with U.S. 10-year yields last down at 3.721%, the lowest since mid-2023.
The worryingly weak July payrolls report saw markets price in a 78% chance the Fed will not only cut rates in September, but ease by a full 50 basis points.
Futures imply 122 basis points of cuts in the 5.25%-5.5% funds rate this year, and rates of around 3% by the end of 2025.
"Signs of emerging weakness in the U.S. economy are evident, with negative indicators from hiring, retail sales, and PMI reports," said Bruno Schneller, managing partner at Erlen Capital Management.
Schneller noted, however, that economic data like GDP and trade remained stable while the prospect of autumn U.S. rate cuts approached.
Analysts at Goldman Sachs also noted the Fed's ability to re-instill market optimism, estimating a 25% likelihood of a U.S. recession.
Analysts at JPMorgan were even more bearish, assigning a 50% probability of a recession.
"Now that the Fed looks to be materially behind the curve, we expect a 50 bp cut at the September meeting, followed by another 50 bp cut in November," said economist Michael Feroli.
"Indeed, a case could be made for an inter-meeting easing, especially if the data soften further."
Investors will get a read on employment in the service sector from the ISM non-manufacturing survey later on Monday and analysts are expecting a rebound to 51 after June's unexpected slide to 48.8.
This week has earnings from industrial bellwether Caterpillar and media giant Walt Disney, which will give more insight into the state of the consumer and manufacturing. Also reporting are healthcare heavyweights such as weight-loss drugmaker Eli Lilly.
The huge drop in Treasury yields had also overshadowed the U.S. dollar's usual safe-haven appeal and dragged the greenback down 0.5% against a basket of other major currencies.
The dollar fell by as much as 3.28% against the Japanese yen to 141.675 but had recovered to 142.675 by 1142 GMT, while the euro dived 2.3% to 156.20 yen. The single currency rose against the dollar to $1.0952.
The Swiss franc was a major beneficiary of the rush from risk, with the dollar falling around 1% and hovering at six-month lows of 0.8500 francs.
"The shift in expected interest rate differentials against the U.S. has outweighed the deterioration in risk sentiment," said Jonas Goltermann, deputy chief markets economist at Capital Economics.
"If the recession narrative takes hold in earnest, we would expect that to change, and the dollar to rebound as safe-haven demand becomes the dominant driver in currency markets."
Investors have also increased wagers other major central banks will ease more aggressively, with the European Central Bank (ECB) now seen cutting by 67 basis points by Christmas.
In commodity markets, gold lost some of its safe haven appeal, down around 2.3% at $2,387 an ounce.
Oil prices eased as concerns about global energy demand offset worries about the potential impact on supply from a widening conflict in the Middle East.
Brent fell 123 cents to $75.58 a barrel, while U.S. crude lost 135 cents to $72.15 per barrel.
