Asian stocks in biggest drop since 2022 on Japan sell-off, tech rout and US economic slump

Unemployment claims in US hit an almost one-year high while manufacturing shrinks

An electronic stock board in Tokyo. Japanese stocks are falling out of favour as the prospect of further interest rate rises by the central bank supports the yen. AP

Asian stocks tumbled on Friday as sentiment was hit by a Japanese sell-off, a global tech rout and weakness in the US economy.

The MSCI Asia Pacific Index dropped as much as 2.8 per cent, the most since June 2022, with Taiwan Semiconductor Manufacturing and Tokyo Electron among the biggest drags.

Japan’s Topix Index headed for a technical correction and the Nikkei faced its worst day in more than four years, dropping more than 5 per cent to fall below the 37,000 level for the first time since April.

It was at 4.89 per cent lower on Thursday, on track for its steepest daily fall since March 2020. Meanwhile, benchmarks in the tech-heavy markets of South Korea and Taiwan fell about 3 per cent.

Traders are taking risk off the table as the investment landscape shifts. Japanese stocks are falling out of favour as the prospect of further interest rate rises by the country’s central bank supports the yen, hitting the shares of exporters.

The Bank of Japan on Wednesday raised interest rates to the highest levels in 15 years and unveiled a detailed plan to slow its massive bond buying.

Disappointing earnings from US tech behemoths has also cooled optimism over artificial intelligence, leading to a rout that has ensnared Asian chip giants.

Traders on the floor of the New York Stock Exchange. Stock markets tumbled on concerns over the health of the US economy. AFP

US stock futures extended their declines, with Nasdaq futures tumbling 1.5 per cent and S&P 500 futures falling 0.9 per cent.

The declines also came amid concerns over the health of the US economy. Data on Thursday data unemployment claims hit an almost one-year high while manufacturing shrank.

US manufacturing activity dropped to an eight-month low in July amid a slump in new orders, which spooked investors, sparking broad risk-off moves across markets, even after the US Federal Reserve signalled a rate cut could come as soon as September.

Investors will be monitoring payrolls data on Friday for further clues about the state of the economy and the Fed’s rate path.

“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.

"As manufacturing and job data are pointing towards recession levels, investors are now questioning whether the Fed is cutting too late. A US recession would also hurt Asia.”

MSCI’s Asia benchmark is on track for its third-straight week of declines. Weakness in Chinese shares also weighed on the region as traders awaited further stimulus measures from Beijing to shore up its flagging economy.

Meanwhile, geopolitical tension also weighed on sentiment, after the Israeli military said on Thursday that the head of Hamas's military wing, Mohammed Deif, was killed in a strike on Gaza last month. The group's political leader Ismail Haniyeh was killed in Tehran this week.

"At the moment ... if there's any signs of weakness, then the market will grasp them. It's looking for bad news," said Rob Carnell, ING's regional head of research for Asia-Pacific.

Currencies fluctuate

The yen was last 0.2 per cent lower at 149.65 per dollar, although it remained pinned near a more than four-month high.

It was set for a 2.8 per cent rise for the week, with gains in the Japanese currency further exacerbated by safety flows on Friday.

The Swiss franc also got a lift from the risk-off mood and rose to its strongest level since early February, at 0.8720 per dollar.

The pound sterling fell 0.09 per cent to $1.2723, after the Bank of England cut interest rates from a 16-year high on Thursday.

US Treasuries rally extends

A rally in Treasuries also extended into a seventh straight day, as traders fixated on coming jobs data to cement their view that the US will pivot to cut interest rates in September.

Bond yields move inversely to prices.

Bonds rallied across the curve in Asia trading on Friday, suggesting a Bloomberg gauge of US government debt will mark its longest winning streak since the Covid-19 pandemic roiled markets in early 2020. The policy-sensitive two-year yield slumped to its lowest in 14 months.

The two-year yield, which typically reflects near-term rate expectations, slumped to its lowest since May 2023 of 4.1090 per cent, and was last at 4.1338 per cent.

Futures now point to a roughly 29 per cent chance of a 50-basis-point cut from the Fed in September.

The optimism about a rate cut reached a fever pitch on Thursday, when an increase in unemployment claims and softer manufacturing data prompted traders to price three quarter-point cuts from the central bank this year.

The benchmark 10-year yield is back below 4 per cent for the first time since February with Friday’s US employment data seen as the next catalyst for the bull run. Forecasters anticipate the report will show moderating job and wage growth in July, emphasising an ongoing softening in the labour market.

“Treasury sentiment is strongly positive and has gained momentum this week,” said Damien McColough, head of fixed-income research at Westpac Banking in Sydney.

“With 10-year yields below 4 per cent, the payrolls number could be a decisive factor into how far the current rally will extend.”

If the jobs data suggest market expectations for rate cuts are justified, the 10-year yield could fall towards 3.8 per cent, Mr McColough added.

Bloomberg’s Treasury index closed at its highest in two years on Thursday.

“Worries are definitely building that the Fed would have to take a faster calibration path to lower rates,” said Eugene Leow, a Singapore-based senior rates strategist at DBS Group Holdings.

“The market is probably focusing on asymmetrical risks as labour market concerns come to the fore.”

With reporting from Bloomberg and Reuters