Global investors are bracing for further turmoil, after fears that the powerhouse US economy could be drifting towards recession sent stock markets tumbling at the end of last week.
Investors in Europe, Asia and New York were spooked by US data that include worse-than-expected job numbers on Thursday, prompting concern that the world’s largest economy is in worse shape than previously thought.
The data, coupled with disappointing results from tech firms Amazon, Alphabet and Intel, led to share sell-offs at the end of last week, while Middle Eastern stocks also fell on Sunday amid persistent tension in the region.
Analysts fear that any further signs of fragility in large economies could herald fresh volatility. A slowdown in Germany last month prompted analysts to warn of a recession, while a rise in interest rates by Japan’s central bank sent shares on the Nikkei index down 2,216 points, or nearly 6%, on Friday.
In the last month, the prospect of a recession in some of the world’s biggest economies has sent the cost of a barrel of Brent crude falling from almost $88 to below $78.
Closely watched economic data due this week in the US includes figures for the services sector on Monday and the unemployment claimant count on Thursday. Elsewhere, the UK is among several big economies, including China and Japan, to release service sector data on Monday.
Chris Weston, of the US online stockbroker Pepperstone, said global markets were “at a truly important juncture”.
He added: “What really matters now is whether money managers and traders feel sentiment has become too pessimistic, or if this deleveraging and risk aversion manifests into even higher volatility and drawdown.
“To answer this pertinent question the market needs to see the outcome of the data to offer increased confidence to price the risk of recession, and how that may feed into earnings expectations, consumer behaviours and business decisions.”
Markets got the jitters last week after US jobs data for July showed a worse-than-expected slowdown, with 114,000 jobs created rather than the predicted 175,000.
The unemployment rate increased to a three-year high of 4.3%, while US manufacturing activity also slumped, falling to an eight-month low in July as new orders tailed off.
The figures stoked anxiety that the world’s largest economy is vulnerable to a recession and may need to cut rates faster than expected to spur demand, rather than unwinding them in a more orderly fashion.
“We’re witnessing the fallout from the curse of high expectations,” said James St Aubin, chief investment officer at Ocean Park Asset Management.
“So much had been invested around the scenario of a soft landing, that anything that even suggests something different is difficult.”
Art Hogan, chief market strategist at B. Riley Wealth, was more relaxed about the prospect of a rout. He said: “This isn’t a Category 3 hurricane, but we are seeing how markets react to signs that the economy is normalising after turning hot in the first half of this year.”
He added: “Markets can find themselves overreacting and investors [latch] on to anything as an excuse to take profits.”
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So far this year, investors have grown accustomed to cooling inflation and gradually slowing employment, which appeared to be setting the scene for the Fed to begin trimming interest rates gradually.
That optimism had driven big gains in stocks: the S&P 500 is up by 12% this year, despite recent losses, while the tech-focused Nasdaq has gained nearly 12%.
But on Friday, the Nasdaq lost 2.4% to finish in correction territory – 10% off its record high, while Japanese equities recorded their worst day since the Covid-19 pandemic, with the Nikkei 225 index down 5.8%.
In London, the FTSE100 blue-chip share index lost more than 120 points at one stage, down by 1.5%.
Europe’s main stock indices also declined on Friday, with European technology stocks falling to their lowest level in more than six months. France’s CAC 40 hit its lowest level since last November, down more than 1%, while Germany’s DAX lost 2%.
In the US, Uber, Airbnb, Hilton International and Coca-Cola are among the big firms posting financial results this week. European bellwether stocks such as the Italian insurer Generali and Deutsche Telekom, will also report this week.
While shares slid, gold hit a new record on Friday as investors flocked to safe-haven assets. The US dollar weakened, lifting the pound by 0.5% to $1.28, and the euro by 1.2% to $1.092.