Wall Street posted its worst day since 2022 on Monday, after Asian stocks and European shares ended trading in the red, as the global stock rout deepened over mounting fears of a US recession and a wider war in the Middle East.
Equities gauges across Asia dropped on the first trading session of the week, after a continued slide in US stocks caused by weak employment figures released last week.
Japan’s Nikkei Index dropped 12.4 per cent as of 5.40pm UAE time. The Hang Seng Index in Hong Kong slipped 1.46 per cent while India's S&P BSE Sensex Index dropped by 2.74 per cent.
The technology-heavy markets of Taiwan and Korea also took a hit.
The Dubai Financial Market’s main equities gauge slipped 4.5 per cent while the Abu Dhabi Securities Market fell by 3.4 per cent. Saudi Arabia’s Tadawul, the biggest Arab bourse, declined by 2.1 per cent.
chief financial officer, Zaye Capital Markets
The GCC markets, which remained muted last week, are reacting to the possibility of a full-blown military conflict amid troubles brewing on the global economic horizons.
The rise of tension in the Middle East is an added worry for regional investors, who are bracing for the impact if the Israel-Gaza war spills beyond borders and turns into a regional conflict.
“Conflict between Israel and Iran already spans multiple countries, including Iraq, Lebanon, Syria and Yemen … [however] a full interstate war with Iran would lack a clear and achievable goal,” said Hasnain Malik, head of emerging markets strategy at Tellimer, an investment research company in Dubai.
“The GCC, geographically in between, is loath to be dragged in, given the vulnerability of its oil and gas infrastructure to [a] missile attack.”
Iran and militant group Hezbollah in Lebanon could begin attacking Israel as early as Monday, US Secretary of State Antony Blinken told foreign ministers from the G7, Axios reported.
The report follows Mr Blinken's conference call to co-ordinate with US allies to put pressure on Iran and Hezbollah to reduce the scale of any retaliation after last week's killing of senior Hamas official Ismail Haniyeh in Tehran and Hezbollah commander Fouad Shukr in Beirut.
Dow and Nasdaq plunge as US recession fears grow
Wall Street continued its decline on Monday after weak employment data led to renewed fears that the world's largest economy is headed for a recession.
The Dow fell 1033.99 points – or 2.6 per cent – as trading closed in the US, while the Nasdaq dropped 3.43 per cent. Both indexes suffered their largest losses in nearly two years. The S&P 500 fell 3 per cent.
Wall Street's fear gauge, the CBOE Volatility Index, rose to its highest level since March 2020.
Causing the recent slide were two employment reports last week, and a Labour Department report that showed the economy added a weaker-than-expected 114,000 jobs last month, a steep decline from 179,000 in June.
Meanwhile, the unemployment rate unexpectedly rose to 4.3 per cent, its highest level since October 2021.
The latest unemployment rate crossed the “Sahm Rule” threshold, which typically indicates a coming recession if the three-month average unemployment rate increases by half a percentage point from its low point in the past 12 months.
Equities are in a “risk-off mode”, Khatija Haque, chief economist and head of research at Emirates NBD, said in a note to investors on Monday.
“US employment data for July came in worse than expected, adding to downside risks for the US economy after a raft of weaker economic data recently.”
Asked about the Sahm Rule last week, Federal Reserve chairman Jerome Powell called it a “statistical regularity”.
“It's not like an economic rule where it's telling you something must happen,” he said.
Mr Powell said some members of the policy-setting Federal Open Market Committee wanted to cut interest rates last month but a “strong majority” were in favour of keeping rates steady.
A September interest rate cut has been all but locked in by traders after the Federal Reserve left its target rate unchanged at 5.25 per cent to 5.50 per cent last week.
Investors now price in a 92.5 per cent probability the Fed will cut rates by 50 basis points when they next meet, according to the CME FedWatch tool.
By holding rates for too long, the Fed risks the possibility of accidentally steering the economy into a recession and driving up unemployment.
Mr Powell has said the Fed is well-positioned to respond to weakness in the labour market with its current interest rate level.
And speaking to CNBC on Monday, Chicago Fed president Austan Goolsbee – who is not a voting member on the FOMC this year – said the Fed would fix the economy if it crumbles.
“If the conditions collectively start coming in like that on the through line, there’s deterioration on any of those parts, we’re going to fix it,” Mr Goolsbee told CNBC's Squawk Box.
Traders are also increasing bets that the Fed will deliver an emergency rate cut before its September meeting, although that is a measure the US central bank has rarely used in recent decades.
Japan's Topix Index plunges after US recession fears
Meanwhile, demand for flights out of Lebanon has surged as foreigners seek to leave amid fears of an all-out war between Hezbollah and Israel.
Beirut's main airport was packed on Sunday night with travellers seeking last-minute tickets after the US, France, the UK and other governments urged their citizens to leave.
“The biggest question is geopolitics, what's happening with Iran. I think the markets are very, very sensitive,” said Naeem Aslam, chief financial officer at London-based Zaye Capital Markets.
“If you look at the volatility index, it rose above 27 on Friday and the Nasdaq futures are already down by about 6 per cent, indicating that we are going to see a much deeper decline.”
The MSCI Asia Pacific Index plunged as much as 3.8 per cent, after a similar drop on Friday.
Monday’s slump has brought the regional equity benchmark close to losing its gains for the year. It has dropped about 10 per cent from its peak of July 11, signalling a technical correction, according to Bloomberg data.
As bond traders started to bet on a deeper cut to interest rates by the Fed, analysts in Europe said the European Central Bank would slash rates by at least 0.5 per cent by the end of the year.
European stocks fall
Stocks in London also slumped more than 2 per cent on Monday morning, as recession fears caused a flight to haven assets in the UK and European markets.
“London markets haven’t escaped the Monday meltdown, with just a handful of companies on the FTSE 100 opening on the front foot and a smorgasbord of sectors losing ground, including miners and oil giants,” said Danni Hewson, head of financial analysis at AJ Bell.
The “torrid” opening to the London market on Monday indicates the “global waves of unease”, said Richard Hunter, head of markets at Interactive Investor.
“Half-hearted moves into defensive stocks provided brief respite … but overall the markdown was widespread,” he said.
Stocks with a particular exposure to the US such as Pershing Square and Scottish Mortgage topped the loser board with losses of more than 8 per cent and 7 per cent, respectively.
Banks also suffered, with the likes of Barclays and NatWest declining by 5 per cent in “something of a read across from the Wall Street experience”, Mr Hunter said.
In Europe, the Stoxx Europe 600 Index fell by as much as 3.2 per cent, its largest intraday decline since March 2022.
The CAC-40 in Paris is now 10 per cent off its recent highs, which is the textbook definition of a market correction.
