This article was published on August 5th, 2024.

Both seasoned investors and newcomers are grappling Japan's rate hike, likely leading to the unwinding of the famous yen carry trade.

Japan, the land of the Rising Sun, may have triggered the fall in stock markets worldwide. Japan’s Nikkei 225 index closed down 12.4% on Monday, marking its worst performance since the 1980s. The Nikkei last experienced such a significant decline on ‘Black Monday’ in October 1987, when it fell 3836 points or 14.9%.

Dr. Vikas V. Gupta, CEO & Chief Investment Strategist, OmniScience Capital says, “The Bank of Japan’s rate hike has significantly impacted global markets, causing Mr. Market to reconsider the financial landscape.”

On one hand, the US Fed is about to cut rates while BoE already cut rates last week. Japan’s central bank took a different view and raised rates. “While Japanese rates are set to rise, the rest of the world is expected to cut rates. This shift disrupts the reflexive strategies that market participants have relied on for nearly three decades. Both seasoned investors and newcomers are grappling with this new reality, likely leading to the unwinding of the famous yen carry trade. The sharp decline in the Nikkei index reflects this adjustment,” adds Dr. Gupta.

Bas Kooijman, CEO and Asset Manager of DHF Capital says, “The Bank of Japan (BoJ) adopted a hawkish stance, raising its key interest rate to around 0.25% and outlining plans to taper bond purchases. This marked the BoJ’s second rate hike of the year. The BoJ also adjusted its inflation and growth forecasts, with core inflation expected to drop to 2.5% and growth to 0.6% in fiscal year 2024. The strengthening yen, rising to JPY 148.9 against the U.S. dollar, posed challenges for Japan’s export-driven companies, further impacting market sentiment.”

U.S. stocks closed sharply lower on Friday, with the technology-heavy Nasdaq Composite falling into correction territory as investors fretted over a softer-than-expected jobs report.

On Monday, S&P 500 opened 215 points lower at 5130, while Nasdaq 100 was trading lower by 910 points at 17530. Nasdaq Composite index is down by about 1000 points while Dow 30 was trading 1133 points lower in the opening hour of the trade on Monday.

S&P 500, Nasdaq 100 and Dow 30 are down by 4%, 4.69xx% and 3% respectively in the opening trades on Monday, August 5, 2024.

European shares also fell to near six-month lows The pan-European STOXX 600 index was down 2.6% at 487.15 points. The UK’s FTSE 100 has suffered its worst drop in more than a year.

Some major losers on Monday in the opening hour of trade:

NVIDIA down by 12%

Tesla down by 8.66%

Apple down by 6%

Intel Corporation down by 7%

Palantir Technologies down by 9%

Amazon down by 6.22%

Other than the Japan factor, it was the US unemployment numbers that may have led to the global market meltdown. The labor market experienced a significant cooling in July, with nonfarm payrolls decreasing by 114,000 and private sector job growth at its lowest since October 2021, and the unemployment rate rose from 4.1% to 4.3%. “Renewed speculation about a long-anticipated U.S. recession has emerged, partly due to a slightly higher-than-expected unemployment rate. However, this rise in unemployment was influenced by increased labor participation and adverse weather conditions in some states. Despite these concerns, we believe the U.S. economy remains strong, with its fundamentals intact,” adds Dr. Gupta.

With inflation not yet tamed fully, the ball is in the US Fed’s court to manage the global equity market crisis. Cutting rates sooner than planned may re-ignite inflationary pressures in the economy. Nigel Green, CEO of deVere Group says, “The Federal Reserve must move to cut interest rates already, especially in the light of a weak jobs report on Friday that’s been driving concerns further about an economic slowdown. It would be beyond negligent for the Federal Reserve not to announce an emergency interest rate cut in response to the global rout in stock markets.”

Source: Financial Express