The fear of a recession in the United States, generated after the publication of worse-than-expected employment and industrial activity data, created a contagion effect which, together with the poor results of some technology companies and the rise in interest rates in Japan, that led to heavy losses on the world’s stock markets.

Tokyo’s Nikkei index had plunged 12.40%, its worst fall since the 1987 crash, spreading to other Asian markets. Wall Street also dropped on Monday: the Dow Jones Industrials, the S&P 500, and the Nasdaq, even affecting the European stock markets, which closed the day’s session in the red. The IBEX suffered losses of more than 2% of its value, its worst session since March 2023.

Stock market volatility during August is nothing new when trading volumes and market makers are at their lowest. Still, this market instability has not been seen since the start of the Covid-19 pandemic. What was happening in the world’s stock markets?

In the shadow of a recession

On the one hand, all eyes were on the US on Friday after it presented data showing that fewer jobs were created in July than expected and that the unemployment rate had risen. These figures called into question the strength of the world’s leading economy and stoked investors’ fears that the Federal Reserve would keep interest rates on hold until September.

In recent months, the US economy has shown clear signs of slowing, which has led many investors to expect the Fed to cut interest rates for the first time since the inflation crisis began. The markets’ reading is that the Fed has been late in containing inflation, which may push the country into a recession.

In this context, there is already talk of the possibility of an urgent interest rate cut by the Fed, after the US central bank missed the opportunity to loosen monetary policy last week, an action it can only take outside scheduled meetings in extreme cases.

On the other hand, the Nasdaq index recorded significant falls in technology companies such as Amazon, Apple, Intel, Google, Meta, Microsoft and Nvidia, which together lost some five hundred and twenty billion dollars in market capitalisation on this black Monday. The worst performer was the chipmaker Nvidia (6%), followed by Apple (3%).

Japan’s rate hike

The volatility and slump in Japan’s benchmark index, both the Japanese stock and bond markets were stopped, started last week when the Bank of Japan raised interest rates for the second time this year and announced plans to reduce its bond purchases.

The central bank’s board had decided to end a period of negative rates and set the price of money between 0% and 0.1%, to address inflationary pressure. This was a change in monetary policy in Japan, where economic growth has been weak for years and where the central bank had previously refused to raise rates for fear that it might trigger a recession.

It seems that the worst predictions of some experts a few weeks ago, that any instability in the country with the largest debt relative to the size and output of its economy could trigger a chain reaction in global financial markets, were not too far off the mark.

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