(Bloomberg) -- A global stocks selloff deepened on Monday as concerns grew that the Federal Reserve is behind the curve with policy support for a slowing US economy, sending investors into the safety of bonds. Japanese shares plunged for a third day as traders priced in more domestic rate hikes.
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Japan’s Topix index tumbled more than 7%, while the yen rallied over 1% on bets the Bank of Japan will keep raising interest rates after last Wednesday’s hike. Korean and Australian shares slid, while US futures declined by more than 1.5%. With investors concerned the US economy may be in for a hard landing, a rally in Treasuries sent yields to the lowest in more than a year.
The price action underscores how quickly sentiment has shifted away from expectations that the Fed will be able to engineer a soft landing for the US economy. Data on Friday showed that US nonfarm payrolls recorded one of the weakest prints since the pandemic, and the jobless rate unexpectedly climbed to above the Fed’s year-end forecast, triggering a closely watched recession indicator.
“It is certainly a case of a conspiracy of ‘risk off’ triggers,” with the Bank of Japan signaling more tightening and the Fed potentially too slow, said Vishnu Varathan, head of economics and strategy for Mizuho Bank in Singapore. “For now though carry unwind and recession fears are co-conspirators to damage risk appetite.”
The moves in Japanese benchmark indexes drove their drops to more than 20% — a loss that signals a bear market. The three-day losses are the worst since the 2011 tsunami and Fukushima nuclear meltdown.
After a Treasuries rally on Friday, Japan’s benchmark 10-year bond yield fell to its lowest since April, slipping as much as 17 basis points to 0.785% on Monday. New Zealand yields declined a similar amount, while Australian bonds were closed for a bank holiday a day before the Reserve Bank of Australia’s policy meeting.
In commodities, oil extended losses Monday amid reports Iran may strike Israel to avenge assassinations of Hezbollah and Hamas officials. Saudi Arabian and Israeli stocks slumped more than 2% on Sunday, outpacing Friday’s losses on Wall Street.
A worsening conflict in the Middle East risks adding more tumult to markets as investors brace for a turbulent second half of the year. A gauge of bond market volatility has climbed, while the VIX Index - Wall Street’s fear gauge - jumped to the highest in almost 18 months.
Economic Slowdown
Investors are concerned the Fed’s decision to hold interest rates at a two-decade high is risking a deeper economic slowdown. Traders are projecting the Fed will cut rates by more than a full percentage point in 2024, with an increased chance of an outsized 50-basis point cut in September, according to data compiled by Bloomberg.
“With the unemployment rate above and core PCE inflation now below the Fed’s year-end forecasts, we believe that the balance of risks favors more aggressive action by the Fed,” said Brian Rose, a senior US economist at UBS Group AG’s wealth management unit. “We are changing our base case to rate cuts of 50 basis points in September and 25 basis points each in November and December” after previously just seeing half that amount by year-end, he wrote in a note to clients.
Bond traders have repeatedly misjudged where interest rates have been headed since the end of the pandemic, however, at times overshooting in both directions and caught off guard when the economy bucked recession calls or inflation defied expectations. At the end of 2023, bond prices also surged on conviction that the Fed was poised to start easing policy, only to give back those gains when the economy kept exhibiting surprising strength.
Elsewhere in Asia, traders will be keeping a close eye on China’s economy after the government on Saturday laid out its priorities to spur consumer spending as weak domestic demand continues to weigh on growth. Private Caixin China services and composite activity data are expected later Monday after manufacturing PMI contracted unexpectedly last week for the first time in nine months.
Key events this week:
Bank of Japan issues minutes of June meeting, Monday
China Caixin services PMI, Monday
Indonesia GDP, Monday
Singapore retail sales, Monday
Thailand CPI, Monday
Eurozone PPI, HCOB Services PMI, Monday
US ISM Services index, Monday
Chicago Fed President Austan Goolsbee speaks, Monday
San Francisco Fed President Mary Daly speaks, Monday
Australia rate decision, Tuesday
Japan cash earnings, Tuesday
Philippines CPI, trade, Tuesday
Eurozone retail sales, Tuesday
US trade, Tuesday
New Zealand unemployment, Wednesday
China trade, Wednesday
Chile copper exports, trade, Wednesday
US consumer credit, Wednesday
ECB Supervisory Board member Elizabeth McCaul speaks, Wednesday
RBA Governor Michele Bullock speaks, Thursday
Philippines GDP, Thursday
India rate decision, Thursday
US initial jobless claims, Thursday
Richmond Fed President Thomas Barkin speaks, Thursday
Chile CPI, Thursday
Colombia CPI, Thursday
Mexico CPI, rate decision Thursday
Peru rate decision, Thursday
China PPI, CPI, Friday
Germany CPI, Friday
Canada unemployment, Friday
Brazil CPI, Friday
Some of the main moves in markets:
Stocks
S&P 500 futures fell 1.4% as of 9:19 a.m. Tokyo time
Hang Seng futures fell 0.4%
Japan’s Topix fell 7.6%
Australia’s S&P/ASX 200 fell 2.5%
Euro Stoxx 50 futures fell 2.8%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.0916
The Japanese yen rose 0.9% to 145.24 per dollar
The offshore yuan rose 0.3% to 7.1431 per dollar
The Australian dollar fell 0.4% to $0.6487
Cryptocurrencies
Bitcoin fell 2.1% to $57,902.01
Ether fell 2.6% to $2,679.89
Bonds
The yield on 10-year Treasuries declined six basis points to 3.73%
Japan’s 10-year yield declined 14 basis points to 0.815%
Australia’s 10-year yield declined four basis points to 4.05%
Commodities
West Texas Intermediate crude rose 0.1% to $73.62 a barrel
Spot gold fell 0.9% to $2,422.41 an ounce
This story was produced with the assistance of Bloomberg Automation.
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