Wall Street braced for a global stock rout, with Japanese shares exceeding their 1987 “Black Monday” loss due to U.S. recession fears prompting investors to flee from risk, anticipating rate cuts to rescue growth. Nasdaq futures fell over 4%, and S&P 500 futures fell around 3% following a sell-off in Japan that spread across European markets. The CBOE’s volatility index, Wall Street’s fear gauge, jumped over 30 points to 53.55, the highest since March 2020. Japan’s benchmark Nikkei average closed 12.40% lower, its largest one-day fall since 1987, while the broader Topix lost 12.48%. Jim Reid, global head of macro and thematic research, noted that thinly-traded summer markets can be more easily roiled, but the moves were grounded in reality, pointing to the Bank of Japan’s new hiking cycle, elevated tech valuations, and a weak U.S. payrolls report.
European shares fell to near six-month lows, with only a handful of stocks trading in the green. The pan-European STOXX 600 index was down about 3%, its lowest since February. Major European indices, including Germany’s DAX, France’s CAC 40, Britain’s FTSE, and Spain’s IBEX 35, all fell more than 2%. The safe-haven yen and Swiss franc surged, and crowded carry trades unraveled, with speculation that investors were unloading profitable trades to cover losses elsewhere. This selling torrent triggered circuit breakers on Asian stock exchanges.
Treasury bonds were in demand, with U.S. 10-year yields dropping to 3.721%, the lowest since mid-2023. A weak July payrolls report saw markets pricing in a 78% chance of Federal Reserve rate cuts in September. Futures imply 122 basis points of cuts in the 5.25-5.5% funds rate this year, and rates of around 3.0% by the end of 2025. Despite emerging weakness in the U.S. economy, Goldman Sachs estimated a 25% likelihood of a recession, whereas JPMorgan analysts assigned a 50% probability. Economist Michael Feroli expects a 50 basis points cut in September, followed by another 50 basis points in November.