The FTSE 100 tumbled on Monday as US recession fears gripped markets, sending global equities into freefall as some investors called for an emergency US rate cut to reinstate the so-called ‘Fed put’.
The FTSE 100 was down 3.2% at the time of writing and was relatively unscathed when you consider the Japanese Nikkei was down a whopping 12% overnight as traders piled into the Yen. US futures pointed to a 4% decline for the S&P 500, while NASDAQ 100 futures were down around 6%.
A stronger Yen has a far-reaching impact as worries about the Yen carry trade sapped the life out of risk assets.
“Friday’s brutal sell off has continued into the new week as investors mull the prospect that the much-touted US soft landing looks like being a whole lot bumpier than markets had hoped,” said AJ Bell head of financial analysis, Danni Hewson.
“Circuit breakers have been firing on Asian markets as stocks tumbled, with investors scurrying to price the impact a stalling US economy is likely to have.
“Friday’s jobs figures dropped like a bucket of cold water on markets already chilled by mixed earnings updates and concern about levels of spending by big tech companies on AI plans.
The VIX volatility index hit the highest level in over a year on Friday as traders reacted to the potential for a deeper selloff in equities if a US recession takes hold. Signalling further fear among traders, the VIX, which tracks short-term S&P 500 options trading activity and is a renowned measure of investor sentiment, spiked higher again on Monday.
The global equity selloff was sparked by a poor Non-Farm Payrolls jobs report suggesting the US economy is heading toward a recession. After fretting about when major central banks will cut interest rates, traders appear to have forgotten why central banks tend to cut rates in the first place: economic growth concerns and slowing inflation.
Speculation about an emergency Federal Reserve rate cut was rife over the weekend, although there is no formal suggestion they will move to cut rates before the next meeting. Some analysts expect the Fed to signal sharp rate cuts in the coming months as opposed to making them before the September meeting to help provide confidence.
“This is precisely the point where we’d expect the Fed to affirm it’s ‘Put’, one way or another,” said George Lagarias, chief economist at Forvis Mazars.
Bond yields sank at the end of last week, and the rally continued into Monday’s session. In June, we highlighted three Bond Funds to consider for a shift in interest rate expectations. Needless to say, all had a very good week last week.
All but three FTSE 100 stocks were down at the time of writing on Monday with tech-focused Scottish Mortgage the biggest faller with a drop of 8%.
Banks were heavily hit, as were miners and the oil majors. There is no stock-specific reason for the declines, and the selloffs were a result of a broad risk-off trade.