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Monday’s Downturn

Global markets faced a significant downturn on Monday, with investor anxiety over a slowing U.S. economy triggering widespread sell-offs across Asia and Europe. This marked a stark reversal for major markets, which had been reaching new heights over the past year due to optimism about cooling inflation, robust labor markets, and advancements in artificial intelligence technology.

The sell-off was particularly severe in Japan, where concerns about the global economy were compounded by the impact of a strengthening yen on corporate profits. The Nikkei 225 index, Japan’s benchmark, plummeted 12.4%, marking its largest one-day point decline since the Black Monday crash of October 1987. Similarly, the Topix index, which encompasses a broad range of Japanese companies, fell by 12.2%.

Europe was not spared, as the Pan-European Stoxx index dropped nearly 3% in early trading, with all major markets on the continent experiencing declines. This downturn followed a disconcerting U.S. jobs report from the previous Friday, which showed a significant slowdown in hiring in July and an increase in unemployment to its highest level in nearly three years. These indicators heightened fears that the U.S. economy was cooling and that the Federal Reserve might have delayed too long in cutting interest rates.

In response to the weak jobs report, Goldman Sachs issued a note predicting that the Federal Reserve would cut interest rates at its next three meetings, a more aggressive stance than the investment bank had previously anticipated. This outlook contributed to the global market jitters.

South Korea’s Kospi index experienced a steep drop of over 10% at one point, while markets in Taiwan, Singapore, Australia, Hong Kong, and mainland China also suffered declines. Indian stocks, which had been among the best-performing in Asia this year, fell by about 3%.

Technology stocks were hit particularly hard, with semiconductor giants Samsung Electronics and Taiwan Semiconductor Manufacturing Company each losing 10%. The U.S. markets were poised for a similar fate, with futures for the S&P 500 down more than 3% and those for the Nasdaq falling by 6%.

Cryptocurrency markets also reflected the heightened investor anxiety, with Bitcoin plummeting more than 10%. The sharp declines in Japanese and Korean stocks even triggered “circuit breaker” mechanisms, temporarily halting trading to allow the markets to absorb the fluctuations. Despite these measures, the sell-off continued to gain momentum, extending into the debt markets and causing a halt in trading of Japanese government bonds.

“The only function of economic forecasting is to make astrology look respectable,” famed economist John Kenneth Galbraith once quipped, and recent market behavior underscores the unpredictability of economic trends. The U.S. economic outlook’s deterioration has had a severe impact on Japan, where a strengthening yen is expected to drag on corporate profits, particularly for major exporters.

The Topix index has fallen more than 20% since the previous Wednesday, when the Bank of Japan raised interest rates for only the second time in nearly two decades. Japanese stocks had been buoyed by a weak yen, which boosted the earnings of exporters. However, the recent yen appreciation has reversed this trend, putting additional pressure on the market.

Foreign investors have also been selling off Japanese stocks. According to the latest data from the Tokyo Stock Exchange, foreign investors sold nearly $4 billion more in Japanese equities than they purchased during the week ending July 26. The previous week saw net sales of $1.5 billion, indicating a continued lack of confidence in the market’s stability.