The global stock market faced a severe downturn on Monday, with Japan's Nikkei 225 index leading the plunge across Asian markets. The Nikkei dropped 7.4% in the afternoon, extending its losses to 22% since early July and edging closer to bear market territory, defined by a 20% decline from recent highs.
This sharp drop follows a significant 5.8% fall on Friday, the largest single-day decrease since March 2020. Traders are concerned about the impact of a strengthening yen on Japanese companies, especially after the Bank of Japan (BOJ) hinted at possible future interest rate hikes. A stronger yen could negatively affect exporters and firms with international earnings.
The yen’s rapid rise has prompted many investors to unwind the yen carry trade, a popular strategy where investors borrow in yen to invest in higher-yielding assets abroad. Last week, the yen surged nearly 5% against the US dollar and strengthened further on Monday, trading at 143.3 yen per dollar.
Stephen Innes, managing partner of SPI Asset Management, noted that the yen's appreciation triggered a global sell-off in carry trades. This, combined with a hawkish shift from the BOJ, a slowing Chinese economy, and weak US tech earnings, led to widespread market turmoil.
The BOJ’s recent rate hike of 15 basis points to 0.25% and plans to cut bond purchases have fueled expectations for additional rate increases later this year as the bank seeks to manage inflation.
China's economic data added to the gloom. The official manufacturing PMI for July showed ongoing weakness in factory activity. In the US, disappointing second-quarter earnings from Amazon and Intel exacerbated concerns, with Intel reporting a $1.6 billion loss and planning significant layoffs.
Asian markets mirrored Wall Street's decline on Friday, with South Korea’s Kospi falling 6.7%, Australia's S&P/ASX 200 dropping 3.1%, and Hong Kong’s Hang Seng Index down 0.2%. Wall Street saw the Dow Jones drop 1.5%, the S&P 500 fall 1.8%, and the Nasdaq Composite decrease 2.4%, with the Nasdaq entering correction territory.
Oil prices also hit their lowest levels since January. Brent crude and US WTI crude both fell over 3% on Friday. Despite ongoing tensions in the Middle East, oil prices may stabilize unless there is a major geopolitical event, according to Tom Kloza, global head of energy analysis at Oil Price Information Service.
Domestically in the US, fuel prices might rise if Hurricane Debby, now a Category 1 storm, affects the Gulf of Mexico. Kloza notes that significant disruptions could lead to higher gasoline prices, although efforts are underway to manage these increases.
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