Global Markets: Sharp Decline on Stock Exchanges Due to Fears of Economic Slowdown

Indices on Wall Street sharply fell on Thursday after a new series of macroeconomic indicators raised concerns that the U.S. economy is slowing down much faster than expected while Fed continues to maintain a restrictive monetary policy.

The Dow Jones index plummeted on Thursday by 494.82 points or 1.21 percent, to 40,347 points, while the S&P 500 fell by 1.37 percent, to 5,446 points, and the Nasdaq index by 2.3 percent or 17,194 points.

The S&P and Nasdaq indices thus nearly erased the largest gains since February, achieved the day before due to a surge in the stock prices of chip manufacturers and signals from the Fed that it might start easing monetary policy in September. However, August is typically the month with the weakest stock performance of the year.

At the beginning of trading on Thursday, the indices continued to rise, supported by a jump in Meta Platforms’ stock price thanks to better-than-expected quarterly results and announced optimistic forecasts for business in the third quarter. Meta’s stock rose by 5.78 percent yesterday and was the biggest winner within the S&P.

However, those initial gains faded after the purchasing managers’ index showed that industrial activity in the U.S. fell to 46.8 points in July, the lowest level in eight months.

– This has caused serious fears that the Fed is lagging in reducing interest rates. Few investors have confidence in the Fed, which is sticking to the proverbially ‘soft landing’ of the economy, and now the data begins to reflect that concern – said Lou Basenese, a strategist at New York’s MDB Capital.

It was also reported that the number of Americans who applied for unemployment benefits last week rose to the highest level in the last 11 months, suggesting tensions in the labor market, although seasonal factors certainly play a role in this.

For a better insight into the state of the labor market, investors are waiting for the employment report to be released on Friday.

The stock prices of major technology companies fell significantly yesterday, with Apple down 1.68 percent and Amazon down 1.56 percent, ahead of the release of business results. After the market closed and the results were announced, Amazon’s stock price plummeted by 4.46 percent in electronic trading.

On the other hand, the biggest gains were seen in defensive sector stocks such as real estate and utilities, while geopolitical uncertainties due to the situation in the Middle East strengthen the dollar and reduce yields on treasury bills.

The Russell 2000 index of small-cap companies also fell by more than three percent, marking its largest daily drop since February 13. Stocks contained in that index have recently been very volatile, as investors rotate capital between cheaper and expensive technology stocks.

– Without a good economy, those small stocks sensitive to changes in the economy will not grow, even if interest rates are lowered – says Steve Sosnick, a strategist at Interactive Brokers.

European stock exchanges sharply fell on Thursday after the Bank of England lowered interest rates from 5.25 to 5 percent, with banking stocks suffering the most, averaging a 4.5 percent drop. The London FTSE ended trading down 1.01 percent, at 8,283 points, the Frankfurt DAX plummeted 2.3 percent, to 18,083 points, and the Paris CAC fell by 2.14 percent, to 7,370 points.

Decline in Asia

On Asian stock exchanges on Friday, the major indices sharply fell, with the Japanese Nikkei recording its worst performance in the last four years, as investors are concerned about the latest U.S. economic indicators and the potential slowdown of the world’s largest economy.

The MSCI Asia-Pacific index was down 0.8 percent around 6:00 AM, following losses on Wall Street. The biggest drop in Asia was recorded by the Japanese Nikkei, which plummeted by 4.7 percent, marking its largest daily drop in the last four years.

Other exchanges also recorded sharp declines, with the South Korean Kospi index down more than three percent, and the indices of the Australian and Hong Kong exchanges down more than two percent.

The poor sentiment among investors in Asia followed the drop on Wall Street the day before, as investors fear a possible slowdown in the growth of the world’s largest economy due to new indicators. On Asian exchanges, banking stocks were under the most pressure from sales, with the Japanese banking group Softbank recording a price drop of more than five percent, and the stock price of chip manufacturer Tokyo Electron fell significantly by more than 9 percent.

Investors were indeed concerned by the purchasing managers’ index, which showed that industrial activity in the U.S. fell to its lowest level in eight months in July, and the number of Americans who applied for unemployment benefits last week rose to the highest level in the last 11 months, suggesting tensions in the labor market. Investor discomfort is also contributed to by geopolitical tensions in the Middle East.

– At this moment, if any bad news appears, the market will immediately embrace it. They are simply looking for bad news – said Rob Carnell, ING’s regional head of research for Asia and the Pacific.

Sharp Correction Also Affects European Markets

On European exchanges on Friday morning, the major indices fell by more than one percent, following the price correction in global stock markets, as weak economic indicators from the U.S. raised concerns about a recession in the world’s largest economy.

The pan-European Stoxx 600 index was down 1.62 percent around 9:30 AM, at 503 points, the lowest level in the last three months. All stock sectors recorded corrections, with technology down the most by 3.7 percent and financials averaging a 2.6 percent drop.

At the same time, the Frankfurt DAX fell by 1.55 percent, to 17,803 points, the London FTSE by 0.54 percent, to 8,238 points, and the Paris CAC by 0.91 percent, to 7,303 points.

Yen and Swiss Franc at Highest Levels in Recent Months

The sharp decline of the Japanese Nikkei index, which has not been recorded since March 2000, is partly due to the Bank of Japan’s decision the day before to raise interest rates to a level not seen in the last 15 years, and it also announced plans to reduce its generous stock buyback program. This, in fact, prompted the yen to rise against the dollar the day before. This morning, the yen is trading at 149.65 yen per dollar, which is close to the highest level in over four months. The yen is thus on track for a weekly gain of 2.8 percent.

The exchange rate of the Swiss franc, which, like the yen, is considered a safe haven for capital in uncertain times, has jumped against the dollar to its highest level since early February, so that the dollar this morning stands at 0.872 francs.

These are the only two global currencies that have risen against the dollar since yesterday, which is paradoxical since it is precisely the problems in the U.S. economy that have raised concerns in the capital market. The euro exchange rate has weakened by 0.07 percent against the dollar, to 1.07845 dollars. In such conditions, the dollar index strengthened today by 0.04 percent, to 104.3 points.