Just a few weeks ago, financial markets were enjoying record highs, but recent trading sessions have seen dramatic and chaotic shifts. Investors, who were eagerly anticipating interest rate cuts, now seem largely indifferent as these cuts are likely to materialise in abundance.
The Japan Nikkei 225 index experienced a significant drop on Monday, marking the largest point fall in its history. In percentage terms, the 12% decline was the steepest since 1959, with Japan’s market plunging 20% over the last two trading sessions. Similarly, momentum-driven sectors like technology and artificial intelligence have been aggressively sold off, with the US NASDAQ and Russell 2000 indices down over 10%, firmly entering correction territory. The blue-chip S&P 500 index has also declined by 9% from its all-time high reached on 16 July.
The causes of this disruption remain unclear, but three key factors stand out. Firstly, Japan’s central bank had maintained a much lower interest rate compared to other countries, which led to the depreciation of the Japanese Yen. Investors took advantage of these near-zero borrowing rates to invest in assets like US technology stocks, Bitcoin, or even US money markets, where rates are still at 5.5%. However, with Japan’s recent policy shift and interest rate hike, the Yen’s value surged, forcing investors to close their positions, triggering a vicious cycle for the markets.
Secondly, there has been a shift in market perception from confidence in a resilient US economy, bolstered by artificial intelligence and falling interest rates, to fears of an impending recession. This shift was triggered by weakening economic data, poor corporate results, and unexpectedly weak July employment figures, which were further dampened by downward revisions for the previous two months.
Lastly, geopolitical tensions have added to market anxieties. The assassination of a Hamas leader in Iran has raised concerns about potential Iranian retaliation against Israel, increasing the risk of escalating conflicts in the Middle East.
In the midst of this turmoil, fixed interest investments have emerged as a safe haven. Government bonds, such as the 10-year US Treasury, have seen yields drop from 4.15% to 3.7%, indicating a 10% price increase. Earlier in July, money markets were expecting a modest 0.25% US rate cut by the end of the year. However, as of last night, they are now pricing in a potential 1% cut, including a possible 0.5% reduction at the Federal Reserve’s upcoming meeting on 18 September.
During such volatile times, long-term investors are advised to remain calm and avoid overreacting to market swings. Seeking sensible and professional guidance on asset allocation and strategy is crucial, as these turbulent periods often present significant investment opportunities. It may also be an opportune time to consider investments that were previously out of reach due to high valuations.
Looking ahead, the US Presidential election on 5 November 2024 could bring further uncertainty. The race between Kamala Harris and Donald Trump appears to be evenly matched, with swing states that were once solidly in Trump’s favour now too close to call. The Democrats have gained momentum with Harris’s nomination and Biden’s decision to step aside, adding another layer of uncertainty for investors to navigate.
TEAM plc (LON:TEAM) is building a new wealth, asset management and complementary financial services group. With a focus on the UK, Crown Dependencies and International Finance Centres, the strategy is to build local businesses of scale around TEAM’s core skill of providing investment management services.
