Stocks and cryptocurrencies simultaneously plummeted at the start of the week due to concerns about the U.S. economic crisis and escalating geopolitical risks.
Today, the Japanese stock market experienced an unprecedented dark day. When the afternoon trading session opened, the Nikkei 225 index dropped 13%, surpassing the record set during “Black Monday” in 1987.
In South Korea, major indices like Kosdaq and Kospi fell nearly 11%. Even traditionally stable markets like Singapore were not spared from the sell-off, dropping over 3%. The MSCI Asia-Pacific index at one point plummeted 5.5%, the largest decline since March 2020, nearly wiping out all gains since the beginning of the year.
Major European stock markets also opened in the red. The FTSE 100 and All Share indices in the UK fell over 2% at the opening. Key indices in Denmark and Poland dropped nearly 4%. Futures for major Wall Street indices also fell sharply, indicating a not-so-positive start to the week’s trading.
The sell-off wave was so intense that market circuit breakers were activated across Asia. The Osaka Stock Exchange had to suspend trading in Nikkei 225 and Topix futures. In South Korea, authorities halted all sell orders in an effort to prevent the sell-off. This emergency action by the South Korean government, according to analysts, highlights the severity of the chaos as investors flee risky assets worldwide.
Cryptocurrencies, a risky investment channel often aligned with stocks, also plunged. Bitcoin, the world’s largest cryptocurrency by market capitalization, dropped nearly 15% in the past 24 hours. Ethereum recorded its biggest drop since 2021, losing over 20%. Combined, these top two cryptocurrencies have lost nearly one-third of their market capitalization in the past seven days.
The sell-off pressure also spread across the market, causing numerous investors to have their futures positions liquidated. According to Coinglass, over $1 billion worth of positions were liquidated on cryptocurrency exchanges.
Conversely, funds are flowing into safe-haven assets. In the bond market, prices surged significantly, pushing the yield on U.S. government bonds to their lowest level in over a year. In Japan, the 10-year bond yield also dropped to its lowest point since April.
The stock market sell-off stemmed from a mix of factors. Concerns about an economic crisis in the U.S. triggered a wave of sell-offs from foreign investors. Additionally, the Bank of Japan’s (BoJ) recent interest rate hike from 0.1% to 0.25% last week was another factor leading to a prolonged sell-off.
In the U.S., job growth in July slowed significantly compared to forecasts, while the unemployment rate rose to its highest level since October 2021. The U.S. Department of Labor reported that the economy added only 114,000 jobs last month, down nearly 36% from June and 38% below economists’ forecasts. The unemployment rate also increased to 4.3%.
Geopolitical tensions in the Middle East are also fueling instability in global financial markets. Oil prices continue to fall amid speculation that Iran may attack Israel in retaliation for the assassination of senior Hezbollah and Hamas leaders. Stock markets in these countries are also in the red due to fears of escalating geopolitical tensions.
Weaker-than-expected economic data has led many to believe that the U.S. Federal Reserve (Fed) will cut interest rates in September, possibly by up to 50 basis points (0.5%).
“Goldman Sachs analysts have increased the probability of a recession in the next 12 months to 25%, although they believe the risk will be limited by the Fed’s policy easing scope. The bank forecasts the Fed will cut by 0.25 basis points in September, November, and December.”
“The premise for this forecast is that U.S. job growth will recover in August. Additionally, the Federal Open Market Committee (FOMC) considers a 25 basis point cut sufficient to address any risks,” Goldman Sachs added. “If we are wrong and the August jobs report is as weak as July, a 50 basis point cut will likely occur in September.”
JPMorgan analysts are even more pessimistic, giving a 50% probability of a U.S. recession in the next year. “The Fed seems significantly behind the curve; we expect a 50 basis point cut at the September meeting, followed by another 50 basis point cut in November,” said economist Michael Feroli.
For cryptocurrencies, aside from crisis fears, the market is also influenced by other factors. The U.S. presidential race is heating up with the confrontation between Republican candidate Donald Trump, who supports cryptocurrencies, and Democratic candidate Kamala Harris, whose stance is unclear. Governments selling seized Bitcoin also contribute to market pessimism.
