Stock markets took a big hit on Monday as investors sold shares in U.S. companies and unwrapped positions in the Japanese yen, which has strengthened against the dollar after the Bank of Japan raised interest rates.
The Dow Jones Industrial Average, which is made up of the largest U.S. companies, closed down 1,033 points, or 2.6%, while the S&P 500 Index fell 3% and the tech-heavy Nasdaq Composite Index slid 3.4% amid selling pressure.
Technology stocks, which had soared in recent months on the craze for artificial intelligence, were hit especially hard, with Nvidia falling more than 6.7% in one day’s trading and Intel dropping more than 7%. Shares of big tech companies have been sluggish since last week following a series of lackluster earnings reports and job cuts.
The stock market decline began on Friday after the July jobs report showed slower job growth and a higher unemployment rate than economists had expected, raising concerns that the Federal Reserve’s high interest rates could weigh on the U.S. economy.
As stocks’ declines accelerated on Monday, investors pointed to the unwinding of “carry trades” — transactions in which stocks are bought with cheap foreign currency that is borrowed and needs to be repaid — as the cause of the selloff.
Ultra-low interest rates in Japan and high interest rates in the United States have made the Japanese yen weaker compared to the dollar, falling to a low of 160-to-1 earlier this summer.
But the yen has strengthened against the dollar since early July ahead of the Bank of Japan raising interest rates to its highest level in 15 years, and the yen-to-dollar ratio has since risen to 144-to-1.
“A lot of speculators borrowed money in Japan at near-zero interest rates, converted the yen into other currencies and speculated all over the world. It was a great trade. It worked, then it went wrong. When the Bank of Japan raised borrowing costs, it went wrong,” investor Ed Yardeni, president of Yardeni Research, told The Hill.
Treasury yields fell as investors sought refuge in more stable government bonds, with the yield on the two-year note falling below 4% for the first time in more than a year.
“Stock markets fell sharply as investors liquidated yen positions, and Treasury yields fell across the board as investors sought safety in U.S. Treasuries,” Joe Brusuelas, chief economist at RSM, said in the analysis.
Analysts say the underlying reason for the market turmoil is that the U.S. economy remains in fundamentally good shape, even as it approaches a key inflection point for the Fed.
“This sell-off is purely driven by mood and positioning, not fundamental weakness, but could be dangerous given that investors are nervous, interest rates remain elevated and the economy is fragile,” Carrie Cox, chief market strategist at Ritholtz Wealth Management, said in a commentary.
The Labor Department’s weaker-than-expected jobs report on Friday has fueled concern among some policymakers and investors that the Fed may have made a mistake by not cutting interest rates at its policy meeting last week.
“They clearly made a mistake,” Mark Zandi, chief economist at Moody’s Analytics, told CNN in an interview Monday. “That’s obvious to everybody, including them, and I think they’re going to react.”
The relative weakness of recent jobs data, which had been unusually strong on the back of massive post-pandemic federal stimulus, is becoming a concern for investors.
Investment bank Goldman Sachs on Monday predicted the Federal Reserve will cut interest rates three times in a row this year to ensure the economy is properly stimulated, and raised its 12-month recession probability to 25% from 15%.
“We expect the Fed to deliver three consecutive 25 basis point rate cuts in September, November and December,” the analysts wrote in a note to investors on Monday.
Other banks expect the Fed to take bolder action and cut interest rates more quickly.
“We are now [Federal Open Markets Committee] Reduce interest rates by 50% [basis points] At the September 18 meeting, 50 more [basis point] “A rate cut is likely on Nov. 7,” Wells Fargo chief economist Jay Bryson wrote in a special commentary published Sunday.
“The Committee expects to lower the target range for the federal funds rate to 3.25 percent to 3.50 percent by the middle of next year, near the level that many observers would consider neutral,” he added.
The recent rise in unemployment is also a concern because the latest jobs report triggered a recession indicator known as the Sum Rule, which states that an economic recession is likely to occur when the three-month moving average of the unemployment rate rises by more than half a percentage point from its recent low.
“This has pushed the unemployment rate above the half-percentage point threshold, but we know this from past experience,” Claudia Thurm, who designed the rule, told Bloomberg on Friday. “The unemployment rate has risen far too sharply in recent months.”
“There’s been enough of a slowdown here. What does it take to level this out?” she added.
Despite the inversion of the bond market yield curve and weak jobs data, other economic indicators remain fairly strong, with gross domestic product growing 2.8% in the second quarter after expanding 1.4% in the first. The Federal Reserve Bank of Atlanta currently projects third-quarter growth to be 2.5%.
Additionally, the Dow Jones Industrial Average is up about 9 percent this year, while the S&P 500 is up more than 14 percent for the year. Gasoline prices and mortgage rates are falling, with a 30-year fixed-rate mortgage falling to 6.34 percent, according to Mortgage News Daily.
Some analysts say Monday’s market turmoil isn’t a sign that investors think the Fed has gone too far and is tipping the economy into a deep recession, but rather that they’ve gotten too bold with the carry trade.
“There are a lot of margin calls happening basically around the world on so-called carry trades and that’s why markets around the world are falling sharply. And it can’t just be because the jobs report on Friday came in below expectations,” Yardeni said.
