Market disruptions raise questions about a global recession

The recent market movements on Monday astonished even experienced traders. In Tokyo, the Nikkei dropped by 12%, the Kospi in Seoul fell by 9%, and in New York, the Nasdaq plunged by 6% within seconds of the opening bell. Cryptocurrencies also declined, while the VIX, a measure of market volatility, soared, and investors shifted their money into government bonds, considered the safest assets. Whether these turbulent fluctuations mark the end of a global sell-off that began last week or signal the start of an extended downturn is uncertain. What is clear is that the fundamental assumptions underpinning the financial market gains of recent years have been shaken. The belief that the US economy is unstoppable, that artificial intelligence will rapidly revolutionize all business sectors, and that Japan will not significantly raise interest rates now appears naive in hindsight. These assumptions have been massively disrupted in recent weeks: the US labor market report for July was disappointing, the AI-driven quarterly results of major technology companies fell short of expectations, and the Bank of Japan raised interest rates for the second time this year. These developments prompted investors to react quickly, resulting in a loss of $6.4 trillion in global stock markets within three weeks. "It’s the great unraveling," commented Vishnu Varathan of Mizuho Bank in Singapore, comparing the current state to trying to catch falling knives. Such market panic carries significant risks, including the danger that a prolonged sell-off could clog the gears of the financial system, slow down lending, and ultimately trigger a global recession that many now fear. This has led to calls for the Federal Reserve to lower interest rates before the next scheduled meeting in September. The flight into short-term government bonds lowered the yields on two-year bonds below those of ten-year bonds, which is often seen as a precursor to a recession. Ed Yardeni, a longtime market observer, recalls the situation on Black Monday in 1987, which ended with a 23% single-day loss in the Dow Jones Industrial Average but did not lead to a recession. He sees parallels to that time: "It had more to do with the internal mechanisms of the market. I think the same thing is happening here." The negative market sentiment has intensified globally in recent days, disrupting the usual late-summer lull. Matt Maley of Miller Tabak + Co., who was on vacation in London, hurried back and resumed his work. He too recalls the market panic in 1987 and feels a sense of déjà vu. The driving forces behind these turbulences have been building up for weeks. In July, the Japanese yen began to rise significantly, followed by disappointing quarterly reports from major technology companies like Amazon and Intel. At the same time, bond markets showed increasing concern, while economic data signaled a cooling down. These events led economists to predict that the Fed would need to take drastic measures. When on Monday the Nikkei dropped by 12% and the yen rose by 3%, even Shoki Omori of Mizuho Securities in Tokyo was surprised. The losses spread to other Asian and European markets and eventually to the US. By the afternoon, US stock markets had somewhat rebounded, but uncertainty remains high. "We are still concerned about the results and the economy," said Maley.