Photo credit: finance.yahoo.com
Asian Markets Decline Amid Recession Fears and Bond Rally
SYDNEY – Share markets across Asia experienced significant downturns on Monday as mounting concerns over a potential recession in the United States compelled investors to retreat from riskier assets. The immediate reaction was a rush toward bonds, sparked by speculation that interest rates may need to be reduced drastically to stimulate growth.
Starting the week with a hefty drop, Nasdaq futures fell by 2.27%, while S&P 500 futures declined by 1.41%. European indices also reflected this negative trend: EUROSTOXX 50 futures decreased by 0.6% and FTSE futures slipped by 0.2%.
In Japan, the Nikkei index plummeted by 5.5%, reaching its lowest level in seven months and marking the index’s most substantial three-day decline since the financial crisis of 2011.
The MSCI Asia-Pacific Index, which excludes Japan, also dropped by 2.0%. However, Chinese blue-chip stocks saw a slight increase of 0.4%, buoyed by a rise in the Caixin services PMI to 52.1.
The bond market reacted sharply, with Japanese 10-year bond yields plummeting 17 basis points to 0.785%—the lowest since April—while speculation raised doubts over further interest rate hikes from the Bank of Japan.
In the U.S., demand for Treasury bonds surged, pushing 10-year yields down to 3.723%, the lowest level observed since mid-2023. Similarly, two-year yields decreased to 3.818%, reflecting a significant drop of 50 basis points in the prior week and suggesting they may soon fall below 10-year yields—a situation that has historically indicated impending recessions.
The latest jobs report, characterized by weak figures for July, has led markets to price in a near 70% probability that the Federal Reserve will not only hold rates steady in September but could also implement a substantial 50 basis point cut. Futures currently suggest a total of 115 basis points in cuts from the 5.25-5.5% range this year, with projections indicating rates could stabilize around 3.0% by the end of 2025.
Goldman Sachs analysts indicated a rise in recession odds to 25%, attributing this to the Federal Reserve’s capacity for easier monetary policy. They anticipate quarter-point cuts in September, November, and December, while also stating that weak employment figures in August could prompt a more aggressive response.
In contrast, JPMorgan expressed even greater concern, estimating a 50% chance of a U.S. recession unfolding. Economists highlighted the possibility of an inter-meeting rate cut, especially if economic data continues to deteriorate.
Investors Seek Safe Havens
Later today, investors are eager for insights from the ISM non-manufacturing survey, with hopes for a rebound in the employment sector to 51.0 following a drop to 48.8 in June. This week, corporate earnings reports will emanate from significant players like Caterpillar and Walt Disney, alongside healthcare companies including Eli Lilly, providing deeper perspectives on consumer behavior and manufacturing health.
The steep decline in Treasury yields has overshadowed the dollar’s traditional role as a safe haven asset, leading to a roughly 1% drop on Friday. On Monday, the dollar continued this downtrend, falling another 1.0% against the Japanese yen, now trading at 144.99, while the euro remained stable at $1.0920. The Swiss franc emerged as a key beneficiary of the risk aversion trend, with the dollar nearing six-month lows at 0.8533 francs.
Jonas Goltermann, deputy chief markets economist at Capital Economics, noted that shifting interest rate expectations against the U.S. dollar have overshadowed deteriorating risk sentiment. Should the risk of recession solidify, the dollar could rebound as its safe-haven demand surges.
Furthermore, traders have begun increasing bets that other central banks will shift toward more aggressive easing, projecting the European Central Bank could implement a 67 basis point cut by the holiday season.
In commodity markets, gold prices have retracted to $2,434 per ounce, potentially reflecting profit-taking strategies in light of losses in other areas. Similar trends were observed in cryptocurrencies, with both Bitcoin and Ethereum experiencing declines.
Oil prices showed some recovery amid fears of escalating tensions in the Middle East, even as demand concerns previously drove prices to their lowest point in eight months. As of now, Brent crude rose by 27 cents to $77.08 a barrel, while U.S. crude increased by 23 cents to $73.75 per barrel.
Source
finance.yahoo.com