Introduction: Market rout resumes as Asia-Pacific markets slide
Good morning, and welcome to our rolling coverage of business, the financial markets, and the world economy.
Global investors are bracing for fresh volatility after suffering losses last week, as anxiety over the health of the US economy sweeps markets.
Stocks have tumbled in Tokyo again today, where Japan’s Nikkei 225 share index has slumped by almost 10% in late trading – hitting its lowest level since late last year, and triggering circuit breakers designed to stop panic selling.
Asian markets getting hammered this morning. Going to be a busy day today. $KOSPI halted in circuit breaker, $NIKKEI down ~10%
— Intern Pierre (@internpierre) August 5, 2024
Other Asia-Pacific markets are also falling, with South Korea’s Kospi down over 8% in afternoon trading, and Australia’s S&P/ASX 200 down 3.5%. Further losses are expected in Europe and on Wall Street today.
Appetite for taking risks has waned, after the tech-focused Nasdaq index sunk into contraction territory on Friday – closing over 10% below its alltime high.
Disappointing US jobs data on Friday added to concerns that the US Federal Reserve may have blundered by not cutting interest rates last week, and might be too late to prevent a recession. The chance of a large reduction in borrowing costs next week has surged.
The implied market probability of a 50 basis point cut by the Federal Reserve in September suddenly surged from essentially de minimis to some 80% as traders increased their overall expectation of both the size and the speed of a Fed cutting cycle.
It is certainly possible that,…— Mohamed A. El-Erian (@elerianm) August 4, 2024
Last week’s selloff came amid a flurry of key events, including:
The Bank of Japan surprisingly raising interest rates, prompting the yen to surge.
A weak US ISM manufacturing report, which showed factory activity contracting last month
A jump in the number of Americans filing new applications for unemployment benefits, to an 11-month high, followed by….
…a drop in job creation, according to July’s non-farm payroll
Underwhelming financial results from major tech companies, which didn’t persuade Wall Street that the huge investments in artificial intelligence were paying off.
The news last weekend that Warren Buffett had cut his stake in Apple may weigh on tech stocks again this week.
Rising tensions in the Middle East hit stock markets yesterday too, as fears grew of a retaliatory Iranian attack on Israel. Saudi Arabia’s benchmark index fell by 2.4% on Sunday, and Egypt’s blue-chip index lost 2.9%.
There’s certainly plenty of fear in the system, as illustrated by Wall Street’s “fear gauge” – the Vix index of expected US stock market turbulence — which jumped last week.
As Stephen Innes, managing partner at SPI Asset Management, puts it:
It’s a bit like watching a slow-motion replay of a spill in a crowded market: you know there’s room for more chaos, but you’re just not sure how much more the aisles can take before everything’s on the floor.
How did the financial snowball start barreling downhill? It kicked off with the Yen bulking up—a move we hinted at positioning for just before the Bank of Japan (BOJ) decided to hike. This beefier Yen set off a domino effect, triggering a global unwinding of carry trades that nudged the VIX into action. Ah, the VIX, our merciless watchdog, always ready to sound the alarm.
From there, the market turmoil morphed into a full-on avalanche, propelled by not one but two vector bear assaults. And if you throw in the dismal high-tech earnings misses into the mix—well, that’s strike three. Each factor compounded the others, turning a manageable slide into a frenzied tumble down the financial slopes.
Today we will get a flurry of data from the services sector, which will show how the UK, eurozone and US economies are faring.
The agenda
7am BST: Russia’s service sector PMI for July
9am BST: Eurozone service sector PMI for July
9.30am BST: UK service sector PMI for July
3pm BST: US service sector PMI for July
Key events
Worryingly, Wall Street’s fear gauge, the VIX, has risen to a four-year high.
Volatility has driven the VIX up to levels not seen since June 2020.
The momentum crash drives the CBOE VIX to a four-year high at 41.8%, just three weeks after it hit a six year low at 10.6% Chart: Bloomberg pic.twitter.com/egEVJcDsuF
— Ole S Hansen (@Ole_S_Hansen) August 5, 2024
Markets are classic sea of red today, flags Chris Beauchamp of IG:
Me in June: gosh a nice little pullback in equity markets would be nice.
Me now: er, no, not like that.
— Chris Beauchamp (@ChrisB_IG) August 5, 2024
Big Tech stocks are heading for further losses when Wall Street trading begins.
Nvidia is down 9% in pre-market trading, while Apple is down 8%, Microsoft is off 5%, Alphabet is 4.7% lower and Amazon is heading for a 2.8% drop.
The selloff is a ‘somewhat healthy correction’ rather than a crash, argues Christian Mueller-Glissmann, Goldman Sachs’ asset allocation research head.
He’s explained to Bloomberg TV that Goldman had turned more cautious a few weeks ago – partly because US economic data had become weaker. The wider markets, though, had treated that ‘bad news’ as ‘good news’, as it could spur interest rate cuts.
Soaring valuations in the tech space were another concern, as was uncertainty over the US general election.
Here’s a clip here:
Goldman Sachs’ Christian Mueller-Glissmann says the market situation is showing a “somewhat healthy correction”
He also says the US data weakness was a surprise, but Goldman Sachs’ economists are “not that worried.” Follow our live blog for updates https://t.co/HYgEqNUdIm pic.twitter.com/nRsSbXYUrO
— Bloomberg TV (@BloombergTV) August 5, 2024
Some happier news: UK services activity growth accelerated in July.
Purchasing managers surveyed by S&P Global show that demand for UK services rose at fastest pace since May 2023 last month.
Business confidence rebounded to a five-month high, with many businesses reporting higher sales volumes, the latest UK UK Services PMI report shows.
Joe Hayes, principal economist at S&P Global Market Intelligence, explains:
“With the general election period coming to an end at the start of July, survey data for last month showed the UK service sector enjoyed a modest rebound after a fairly subdued end to Q2.
The Business Activity Index crept up only slightly, but the New Business Index jumped by over three points to its highest level in 14 months as firms reported an influx of new clients and contracts.
The stock market turmoil shows the importance of a well-balanced portfolio, argues Ben Seager-Scott, chief investment officer at Forvis Mazars:
“Last week ended on a sour note for global equities following a bad run of results from a number of US mega cap technology stocks and poor economic readings in the form of Purchasing Manager Indices and the latest US labour market report.
With expectations set high earlier this year, it doesn’t take much bad news to create sharp movements to the downside. However, it is too easy to be drawn to the worst-case scenario, and on the whole, we remain neutral. What this does highlight though is the need to look beyond a small selection of equities and markets when managing your portfolio.”
Some stock market darling have been hit badly by the recent change in sentiment.
Chipmaker Nvidia, for example, are down 14% in the last month, but up 140% in the last year.
More weak economic data from the eurozone: investor morale in the euro area has fallen for the second month running.
The Sentix index for the euro zone fell to -13.9 points for August, from -7.3 in July, which is its weakest reading since January.
UBS Global Wealth Management’s base case remains that the US economy will avoid a recession with growth remaining close to the 2% trend rate.
They’ve also increased their expectations for US interest rate cuts, and expect a full percentage point reduction by the end of 2024.
Mark Haefele, their chief investment officer, says:
“US equities and bond yields fell in tandem on Friday due to weak US jobs data, raising concerns that the Fed may have delayed rate cuts too long, risking a recession.
We now anticipate 100 basis points of rate cuts this year, up from our previous forecast of 50 basis points.”
Back in the markets, the FTSE 250 index of smaller UK companies is also having a torrid time.
The FTSE 250 – seen as a better barometer of the British economy than the FTSE 100 – has shed 2.5% this morning.
It’s being dragged down, partly, by oil services company John Wood Group – its shares have tanked by 38% after Dubai-based suitor Sidara abandoned its takeover attempts.
Sidara blamed “rising geopolitical risks and financial market uncertainty at this time”….
Eurozone grows “at a snail’s pace in July”
Just in: the eurozone economy stalled in July as demand for goods and services deteriorated.
That’s according to the latest poll of purchasing managers, by data firm S&P Global.
It’s eurozone Composite PMI Output Index has fallen to a five-month low of 50.2, a level which shows activity barely rose last month (50 is the cut-off between expansion and contraction).
Growth in the services sector slowed, with companies reporting a weakening in new business.
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, says:
“The eurozone’s economy is growing at a snail’s pace in July. Sector-wise, services is not picking up speed like it did earlier in the year, while the industrial slump has continued unabated. Because of this, the HCOB Composite Output PMI is just hovering above the expansion line.
So, while the second half of the year started off pretty weak, the PMIs and the official numbers for economic growth in the second quarter were surprisingly good. Given this situation, our 0.7% growth forecast for the year is still conservative. “You cannot miss the slowdown in the service sector. The PMI has dropped for three months straight to 51.9, companies have been more hesitant about hiring, and new business is barely ticking up.
The extraordinary effects from the European Football Championships in Germany, the Olympics in France, and Taylor Swift’s concert tour in Europe are winding down too. So, the service sector probably won’t give us much of a boost in the second half of the year.
After an hour’s trading, the UK stock market has sunk deeper into the red.
The FTSE 100 share index of the largest companies listed in London has now fallen below the 8,000 point mark for the first time since April.
It’s down 190 points, or 2.3%, at 7,984 points – on track for its worst day since last October.
Just two companies are bucking the selloff – Haleon (maker of toothpaste, vitamins and pain relief) and BAE Systems (maker of fighter jets, combat vehicles and warships). They’ve both up around 0.9%.
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