(Bloomberg) -- The flight out of global equities is becoming a stampede as increasing signs of a US economic slowdown spur a pivot toward the haven assets of Treasuries and gold.
Shares tumbled across Asia Friday, with a broad Japanese gauge posting its worst day since 2016, as they tracked declines globally. Chipmakers joined the US tech selloff, with key producer SK Hynix Inc. tumbling 10%. All in, traders are taking money off the table before a potentially crucial nonfarm payrolls report due at the start of the US session.
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The price action underscores how quickly sentiment has shifted away from expectations that the Federal Reserve will be able to engineer a soft-landing for the economy. Fed Chair Jerome Powell’s acknowledgment of the weakening data this week has lent strength to bets the central bank would need to cut policy rates three times by year-end. The rush for Treasuries sent the 10-year yield below 4% this week for the first time since February.
“The narrative is changing quickly after a confirmation of the FOMC’s September rate-cut path,” said Billy Leung, an investment strategist at Global X Management in Sydney. “As manufacturing and jobs data are pointing toward recession levels, investors are now questioning whether the Fed is cutting too late.”
Japan’s Topix index plunged 6.1% Friday, while the regional MSCI Asia Pacific Index slumped about 3.4%. That came after the S&P 500 Index and the tech-heavy Nasdaq 100 gauge both slid in New York. The policy-sensitive Treasury two-year yield has fallen more than 25 basis points this week, while gold is nearing a record high.
Forecasters anticipate the monthly US jobs numbers will show moderating job and wage growth in July, underscoring a further softening in the labor market. Payrolls probably rose by 175,000 last month following June’s 206,000 increase, according to the median estimate in a Bloomberg survey.
Behind Curve
Investors are becoming jittery that the Fed’s reluctance to trim rates is jeopardizing its efforts to avoid a slowdown. Swap markets are now pricing in about three US rate cuts this year, implying a 25-basis-point move at every meeting through year-end. The Fed’s latest dot-plot chart for June showed only one reduction this year.
“In coming days there may be even a discussion about whether the Fed will have to cut by 50 basis points at the next meeting in order to catch up with the loss of momentum in the economy,” Gary Dugan, chief executive officer of the Global CIO Office, said in an interview on Bloomberg Television. “From the peak a 10%-to-15% correction wouldn’t be strange in this huge change in shift in sentiment in the markets as central banks look well behind the curve.”
Risk assets have taken a beating in recent sessions for other reasons too. Lackluster earnings from Microsoft Corp. to Amazon.com Inc. have hurt sentiment that is also being weighed down by concern about the sluggish Chinese economy and a weakening of the earlier euphoria over artificial intelligence. Middle East tensions have also multiplied after the assassination of Hamas’ political chief in Tehran.
Japan is seeing a particularly ferocious selloff. The Nikkei 225 Stock Average slid 5.8% Friday, while a gauge of banks in the Topix Index logged its worst session since 2008. Both of the nation’s key benchmarks entered a technical correction.
The nation’s equities are being roiled by the outlook for tighter monetary policy after the Bank of Japan raised rates this week.
“The BOJ opening the door for further tightening over coming months has triggered an aggressive unwinding in Japanese equities, which has exacerbated the weakness in risk sentiment across the region,” said Jun Rong Yeap, a market strategist at IG Asia Pte. The Nikkei’s selloff may extend toward the 35,200 level before stronger dip-buying kicks in, he said.
What our strategists are saying:
“There will be two US inflation reports to drop before the FOMC meets in September. More cracks in the jobs market and a couple of cool CPIs will stoke the theme of Powell being behind the curve.”
— Mark Cranfield, Markets Live Strategist in Singapore
The Treasury two-year note is heading for a fourth day of gains, pushing the yield down to the lowest since May 2023. That was after Bloomberg’s Treasury index closed at its highest level in two years on Thursday. Gold has gained 3.3% this week to approach its record high set in mid-July.
“There is a sudden fear gripping investors that ‘bad data is indeed bad news for stocks’ as the US may not see a soft landing,” said Chetan Seth, an Asia-Pacific equity strategist at Nomura Holdings Inc. “The nonfarm payrolls report tonight is a huge focus now and stock investors will be hoping that we don’t see a big disappointment. This is a reminder for stock investors — be careful what you wish for.”
--With assistance from Sybilla Gross, Finbarr Flynn, Matthew Burgess, Sangmi Cha, Abhishek Vishnoi, Kelly Li and Nguyen Kieu Giang.
©2024 Bloomberg L.P.