Investors on Monday turned to safe-haven assets as a global stock sell-off deepened, following weaker-than-expected U.S. jobs data at the end of last week.
The disappointing jobs report spurred investor fears that the Federal Reserve made a mistake last week when it kept interest rates unchanged, and that the world’s largest economy is headed toward a recession.
The stock sell-off has also been exacerbated by volatility in some of the major earnings and a more hawkish Bank of Japan, which has led to speculation that the popular yen “carry trade” has imploded over a short-term basis. A “carry trade” takes place when investor borrows in a currency with low interest rates, such as the yen, and reinvests the proceeds in a currency with a higher rate of return.
On Monday morning, the Swiss franc strengthened up to 1.2% against the dollar to trade at 0.847 against the greenback, its strongest level since January this year.
U.S. Treasury yields, which move inversely to prices, extended their fall to notch a one-year low. At 5:45 a.m. ET, the yield on the 10-year Treasury was down by five basis points to 3.741%. The 2-year Treasury yield was last trading at 3.7704% after falling by 10 basis points. The yield on Japan’s 10-year government bond meanwhile plunged 20 basis points to 0.763%.
Gold futures, initially higher, had cooled by mid-morning in Europe to a 0.06% decline.
The buying was in sharp contrast to the selling seen in the stock markets. U.S. stock futures fell early Monday, with the Dow Jones Industrial Average futures declining by some 600 points, or roughly 1.5%. S&P 500 futures and Nasdaq-100 futures dropped 2.7% and 4.45%, respectively.
Japan stocks confirmed a bear market in Asia overnight. The 12.4% loss on the Nikkei — which brought it to close at 31,458.42 — marked the worst day for the index since the “Black Monday” of 1987. The loss of 4,451.28 points on the index was also the largest decline in terms of points in its entire history.
In Europe, the regional Stoxx 600 index was 2.54% lower, with all sectors and major regional bourses trading in the red. Tech stocks shed as much as 5% before paring losses slightly to trade down 3.6%.
What’s driving losses?
While U.S. recession fears appeared to trigger the start of the sell-off last week, Peter Schaffrik, global macro strategist at RBC Capital Markets, said wider factors should not be overlooked.
“When you look at the labor market report in a bit more detail, I think there are some legitimate concerns about whether it was actually as weak as it as it was stylized,” Schaffrik told CNBC’s “Squawk Box Europe” on Monday. Schaffrik added that the totality of recent U.S. data would still most likely lead the Federal Reserve to cut rates by 25 basis points in September, rather than opting for a bigger trim.
Schaffrik went on to say that the big movements in the yen should not be overlooked, while equity market wobbles are reinforcing further developments as investors scrabble to reposition.
“We are in a position now where the market moves create market moves,” Schaffrik said.
“When you look at people who have some kind of positions on, those positions then get lopsided, because the market moves in the other direction. If they move in these magnitudes, on top of that you have [volatility] spiking, you’ve got a significant [value at risk] shock.”
The Vix index — a measure of market volatility — leapt to its highest level in nearly four years on Monday.
Schaffrik continued: “That forces people to take down their positions overall. And obviously, they have to sell into a falling market already, or have to buy into a rising market in the case of Treasurys. And that then reinforces itself.”
Valuation correction
Ted Alexander, chief investment officer at BML Funds, said that the current volatility in markets has “been a long time coming,” and that it was not a reason to panic.
“Everyone’s been expecting it for a while, [it’s] great for active managers,” he told CNBC via email, adding that the shake up may actually bring equity investors back if stocks offer better value.
“Stock markets aren’t cooked yet. Don’t abandon some exposure to tech and growth,” Alexander said.
George Lagarias, chief economist at Mazars, shared a similar view in a note on Monday.
Stock and bond market moves are “not due to an impending [U.S.] recession. Stocks are naturally correcting and bonds are rising due to worse-than-expected macroeconomic data,” Lagarias said.
Rather than an equity sell-off presenting a case for a broad market re-rating, the detail of stock movements indicate some spillover from the yen carry trade, a partial unwinding of the AI trade, a re-rating of the tech sector and some profit-taking after a long period of high valuations, Lagarias argued.
“Assuming that the Fed acts quickly enough so that a risk assert correction doesn’t threaten an actual recession, a further correction could thin out the market and allow investors to re-deploy cash at more reasonable valuations,” he said.
