Falls continue on financial markets, over fears of US economic slowdown
Tuesday, 6 August 2024
Markets around the world are in a mini-panic. Worried about a slowing US economy, investors sent the market in Japan to its worst day in decades and sliced billions off some of the world's biggest technology companies. They've turned a relatively calm year in markets on its head.
For most of the year, investors worldwide drove stock markets higher, convinced that central banks were successfully, if slowly, getting inflation under control, and boosted by a healthy US economy and the promise of artificial intelligence.
That confidence has taken a hit the past few days. Investors are listening to warnings that Nvidia and other Big Tech stocks have got too expensive, and that massive spending on AI might not turn into profits for a while. Weak readings on the job market, manufacturing and construction last week sparked worries about a US recession and criticism that the Fed waited too long to cut rates. Meanwhile, the Bank of Japan has started raising rates, causing turmoil in Japan’s markets.
Traders in the US are betting the Federal Reserve will have to cut rates by half a percentage point in September instead of the usual quarter point. Some are calling for an emergency rate cut. However, there are opposing voices saying the sell-off is actually a good thing because stock prices had risen too high.
Here’s a look at what’s driving the turbulence in markets:
Inflation and central banks
Though the Fed hasn’t raised its benchmark rate in a year, interest rates remain at more than two-decade highs after the US central bank raised them 11 times beginning in 2022 in an effort to get inflation down to its 2% target. Part of the Fed’s goal was to cool a red-hot labour market that rebounded after the pandemic recession with the rest of the US economy.
Investors thought the Fed and other central banks were on track, even though inflation remained somewhat above their targets. The European Central Bank and the Bank of England cut once, and the Fed has signalled it was prepared to start cutting rates in September.
Anxiety over the US economy
There had been some pockets of weakness in the US economy, particularly spending by lower-income Americans, but overall the economy still grew at a rate of 2.8% in the second quarter. Then came last week's economic reports.
On Friday, the government's monthly report on the job market showed a significant slowdown in hiring by US employers. Worries that the Fed may have kept the brakes on the economy too long spread through the markets. Reports on manufacturing and construction were also weak.
Big Tech
While technology stocks have been the biggest winners this year, members of the highly influential group of stocks known as the “Magnificent Seven” underwhelmed investors in their latest earnings reports.
Apple fell 5% after Warren Buffett’s Berkshire Hathaway disclosed that it had slashed its ownership stake in the iPhone maker. Shares in Nvidia fell by a further 7% on Monday.
Japan's slump
The Nikkei suffered its worst two-day decline ever, dropping 18.2% in the last two trading sessions. The wave of selling hit all sorts of companies, including Toyota, Honda and computer chip maker Tokyo Electron.
Share prices have fallen in Tokyo since the Bank of Japan raised its benchmark interest rate on Wednesday.
The yen rose to 143.25 for one US dollar on Wednesday morning. It had topped 160 in the spring.