Global investors panic over a possible global recession
Monday’s panic among investors that wiped out billions in stock value raised concerns among market watchers of a possible global recession.
The broad sell-off caused the index tracking the Tokyo Stock Exchange, the Nikkei, to plunge more than 12 per cent — a drop not seen since 1987 — while the Dow in the U.S. fell more than 1,000 points.
But in early trading on Tuesday, most global markets had rebounded — except for shares on the Toronto Stock Exchange that caught up with the downward trend after being closed for the civic holiday. Stock prices of giants like Shopify, RBC and Brookfield Corp. all dropped Tuesday morning.
The S&P/TSX Composite fell as much as 2.6 per cent at market open, but recouped some losses by mid-afternoon to close down 1.12 per cent. By end of trading day, all major indices in the U.S. and South America were in the green while the Nikkei shot up 10.23 per cent.
Market analysts, money managers and economists are still trying to make sense of what happened.
“It probably was a bit of an overreaction,” said Dan Hallett, portfolio manager at HighView Financial Group.
Part of the reason investors dumped stocks is fears of a potential recession in the U.S., after it reported worse jobs data than expected by economists last week, while the Federal Reserve has kept its key interest rate at 5.4 per cent for about a year now.
And a recent interest rate hike by the Bank of Japan led to a stronger Japanese yen relative to the U.S. dollar. This contributed to the sell-off as foreign institutions borrowing money from Japanese banks at previously lower interest rates now have to repay their loans with a currency worth less.
Finally, investors that bet on Big Tech backed by the promise of artificial intelligence sold stocks following a round of disappointing earnings reports. When expectations are built into stock prices, said Hallett, investors tend to be extra sensitive to negative information.
“I just don’t think yesterday was one of those dramatic days,” he said, comparing watching Monday’s news with the moment he found himself sitting in a Toronto hotel room in September of 2008 witnessing the fall of investment bank Lehman Brothers, which triggered record-breaking stock losses.
One economist called the reaction from the market to the latest U.S. jobs report “disorderly.”
While a soft landing is the most likely outcome for the American economy, added Stephen Brown, economist at Capital Economics, if the reaction is sustained, it could persuade the Federal Reserve to cut its key interest rate faster than he expects.
Some are even speculating that the Federal Reserve will evoke an emergency meeting before the scheduled day in September to manage recession fears.
“Our biggest concern is that the market sell-off becomes a self-fulfilling prophecy,” by causing CEOs to cut back on investments, leading to more job cuts and a recession, said Michael Driscoll, managing director at Morningstar DBRS, in a note to clients on Monday.
This article was first reported by The Star
