We start the first week of August quite unexpectedly. We are witnessing a sell-off in Asian stock markets. The Japanese Nikkei has fallen by nearly 13.5%. Considering the last three sessions in Japan, the Nikkei has experienced its sharpest drop since 1946 (-21%). Some stock exchanges in Asia responded by suspending trading out of fear of deeper declines. The situation in Asia is automatically spilling over into other markets.
Europe also woke up to red numbers. Poland’s WIG index opened with a -3.2% drop. Everyone is now waiting for Wall Street’s reaction, where declines are also expected. The question is, how deep will they be?
What happened over the weekend?! It is speculated that today’s collapse in Asia is due to a negative reaction to the second interest rate hike by the Bank of Japan this year. Investors decided to take profits in this situation – the Nikkei 225 had reached its highest levels in six months since the early 1990s.
Concerns about a recession in the US, fueled by last week’s employment report, have added fuel to the fire. The US has the highest unemployment rate in 3 years (4.3%) and a small increase in employment (114,000). This data likely delays the anticipated interest rate cuts in the US. Additionally, the market reaction will favor Republicans in the presidential race.
The last element behind this sell-off is the fear of escalating tensions in the Middle East. US Secretary of State Tony Blinken announced that a retaliatory attack by Hezbollah groups from Iran and Lebanon could happen as early as today.
The correction in stock prices, although significant, is a correction of the bull market rather than a sign of a more serious recession, at least according to the American definition. Events from the next Tuesday session will be crucial in this entire scenario.
