Global Stock Markets Plunge as Tech Sector Slump Triggers Flight to Safe Havens
On Thursday, stock markets experienced a massive downturn, driven by a drop in global tech stocks that led investors to seek refuge in traditional safe havens such as bonds, the yen, and the Swiss franc.
European markets fell over 1% in early trading, reacting to Wednesday’s severe decline in the Nasdaq, its worst day since 2022, following disappointing earnings reports from Alphabet and Tesla. Chinese stocks, iron ore, and oil prices also declined after China’s central bank unexpectedly cut long-term interest rates, intensifying concerns about the world’s second-largest economy.
The stock market sell-off spurred increased expectations for global rate cuts, with futures indicating a 100% probability of a Federal Reserve easing in September. A surge in market volatility triggered a squeeze on carry trades, causing the U.S. dollar to drop 0.7% to 152.78 yen.
MSCI’s broad index of world stocks fell by 1%, while Japan’s Nikkei plunged 3.3%, further impacted by an 11% drop in Nissan Motor’s stock following a 99% slump in its quarterly profit.
Taiwan’s markets remained closed for the second day due to a typhoon.
Chinese blue-chips declined 0.9%, with the Shanghai Composite Index hitting a five-month low. Hong Kong’s Hang Seng Index dropped 1.7%, showing little reaction to Beijing’s recent easing measures.
On Wall Street, the Nasdaq fell nearly 4% as weak earnings from Alphabet and Tesla eroded confidence in the already high valuations of the “Magnificent Seven” stocks. This decline contributed to increased market volatility, with Wall Street’s fear gauge rising to a three-month high. Investors turned to cash and highly liquid short-term debt, with U.S. two-year yields hitting their lowest level in almost six months on Wednesday.
Geoff Yu, senior FX and Macro strategist at BNY Mellon in London, noted, “There are a multitude of drivers at the moment, especially what is going on with the stock markets.” He also highlighted weakening car sales in the U.S., Europe, and Japan, along with China’s rate adjustments as indicators of softening global consumer demand. “With the policy responses, markets will be saying bad news is bad news,” he added.
Yen and Swiss Franc Surge
The yen, a traditional safe haven, surged over 1% to its strongest level in 2.5 months. This rise came ahead of next week’s Bank of Japan meeting, where policymakers will consider whether to raise interest rates. The Swiss franc also gained 0.5% to 0.88 per dollar, adding to its 0.7% overnight increase.
Short-dated bonds saw a rally, supported by former New York Fed President Dudley’s comments advocating for a rate cut, ideally at the upcoming policy meeting. The yield on two-year Treasuries dropped another 3 basis points to 4.3894%, following a 4 basis point decline on Wednesday. Ten-year yields also eased by 2 basis points to 4.2622%.
Markets are fully pricing in a quarter-point rate cut from the Fed in September, with some even anticipating a 50 basis point cut. For all of 2024, a total easing of 65 basis points has been factored in.
Andrew Lilley, chief rates strategist at Barreyjoey in Sydney, expressed concern, stating, “The rate cut expectations are getting very elevated, similar to last year. My worry is that the market is getting ahead of the economic data because these short-term dips in inflation haven’t been sustained.”
U.S. GDP data due later on Thursday is expected to show growth picking up to an annualized 2% in the second quarter. The Atlanta Fed GDPNow indicator points to 2.6% growth, indicating potential upside risks.
In commodity markets, iron ore prices fell nearly 1% due to China concerns, copper dropped 1.2%, and oil prices remained near six-week lows. Brent futures declined 0.5% to just over $81 a barrel, while U.S. West Texas Intermediate (WTI) crude fell to $77.23. Gold also dropped 1% to $2,373.62 an ounce.
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