Volatility in the financial markets at the start of the new trading week is being driven by fears of recession in the US and soft consumer demand, with the possibility of a soft landing for the US economy looking increasingly unlikely.
Japan’s Nikkei 225 index fell more than 12%, while European stocks also fell sharply. The VIX, a measure of market volatility, jumped to 64.06, its highest level since the pandemic began in March 2020. It follows a sell-off in US stocks, after weaker-than-expected US employment data stoked recession fears.
Lindsay James, investment strategist at Quilter Investors, said: “Concerns have risen that the US economy is seeing a rising risk of recession at the same time as the Bank of Japan has begun to raise rates, effectively stymying the popular carry trade which saw investors borrowing cheaply in yen to invest overseas.”
Despite a generally positive second quarter earnings season, high-profile disappointments among the Magnificent Seven stocks, such as Microsoft and Amazon, have also caused significant drops in the index, and spurred fears that US stocks could continue to drop this year, dragged down by the self-off among the tech sector.
However, Ben Barringer, technology analyst at Quilter Cheviot, said when valuations are as high as they are for the big tech stocks, any blip is likely to cause shockwaves.
“Investors need to be prepared for this and be comfortable with the reason they are investing in these stocks in the first place. The news out in the last week and over the weekend would point to a slight overreaction in the movement in tech stocks, with Nvidia’s delays with its Blackwell product flagged well in advance of this more formal announcement.”
He continued: “The bigger concern for tech companies, and semiconductors in particular, is that this is a cyclical industry. Demand will impact sales and thus any slowdown will filter through to some of these tech giants. The macroeconomic data out last week is pointing to a more extreme slowdown than had been anticipated, putting into doubt the coveted soft landing the Federal Reserve is after. As such, the next few weeks is likely to be a volatile one for tech stocks as this new environment plays out.”
US economic data showed the unemployment rate rose to 4.3% in July and nonfarm payroll employment edged up by 114,000.
Michael Langham, economist at abrdn, said market pricing is now indicating a belief that the Fed is “behind the curve” and will cut rapidly in upcoming meetings to avoid a hard landing.
“This has all spilled into Asian markets, with carry trades unwinding and risk-off sentiment prevalent,” he added.
James commented: “Economic data has been taken badly at a time when sentiment has already been more sensitive to bad news and challenged investors’ expectations of soft landing, which had become a high conviction view across the market.
“With the Federal Reserve also holding off on a first rate cut, but signalling that inflation looked to be on track to allow for an initial move in September, investors were concerned that cuts would come too late, with the Bank of England and ECB having already made the first move down. This seems a stretch given the fundamental health of the US economy. Growth in the second quarter was a respectable 2.8% on an annualised basis, which ultimately raises the potential for US growth in years to come but with welcome downward pressure on prices.”
James said that while recent volatility could be indicative of further volatility to come, long term investors should take advantage of more attractive valuations with globally diversified, multi-asset portfolios that are well equipped for this backdrop.
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