Three weeks ago, financial markets were riding high, with record-breaking share indices, but recent trading sessions have seen sudden, chaotic declines. Investors, once eager for interest rate cuts, now appear indifferent despite their impending abundance.
On Monday, the Japan Nikkei 225 index experienced its largest point drop in history, with a 12% fall, the steepest since 1959. Over two sessions, Japan’s market plummeted by 20%. Momentum-driven sectors like technology and artificial intelligence were hit hard, with the US NASDAQ and Russell 2000 indices down more than 10%, entering correction territory. The blue-chip S&P 500 index has also dipped 9% from its peak on 16 July.
The exact cause of this market disruption remains unclear, but three primary factors stand out. Firstly, the Japanese central bank’s prolonged low-interest rates and the depreciation of the Yen created an environment where investors borrowed cheaply in Yen to invest elsewhere, such as in US technology stocks or Bitcoin. However, a shift in Japan’s policy, raising interest rates and strengthening the Yen, forced investors to close their positions, triggering a market sell-off.
Secondly, market sentiment shifted from optimism about a resilient US economy, bolstered by artificial intelligence and falling interest rates, to fears of a recession. This was driven by weakening economic data, disappointing corporate earnings, and unexpectedly weak July employment figures, which included downward revisions for previous months.
Finally, geopolitical tensions have escalated following the assassination of a Hamas leader in Iran, raising concerns of potential retaliation against Israel and the risk of broader conflict in the Middle East.
Amidst the turmoil, fixed interest investments have provided a safe haven, with government bonds acting as a buffer for investors. The yield on a 10-year US Treasury has dropped from 4.15% last week to 3.7% today, reflecting a 10% increase in price. Market expectations have shifted, with predictions of a 1% rate cut by the end of the year, including a 0.5% reduction at the Federal Reserve’s upcoming meeting on 18 September.
Long-term investors should remain calm and avoid reacting impulsively to market volatility. Professional advice on asset allocation and strategy is crucial, as such periods of turbulence can present significant investment opportunities. Now may be an opportune time to consider acquiring those investments previously deemed too expensive.
Looking ahead, the US Presidential election on 5 November 2024 could bring further uncertainty. With Kamala Harris energising the Democrats following Joe Biden’s withdrawal, and Donald Trump no longer assured of an easy victory, the race is now too close to call, adding another layer of unpredictability for investors.
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