Financial markets have seen a dramatic shift in sentiment, going from bullish to panicky in the space of a few weeks, according to a report in The Economist.
Stock markets were at all-time highs, but are now in steep decline, according to the magazine.
The US tech-heavy Nasdaq 100 has fallen more than 10% since mid-July. Japan’s Topix index has fallen even more, falling by double digits by 6% on August 2 alone, making it its worst day since 2016 and its worst two-day streak since 2011.
Panic in the markets
The Philadelphia Semiconductor Index, which tracks global chipmakers, has fallen sharply by more than 20% in recent weeks.
Meanwhile, companies like Arm lost 40% of their market value. Nvidia, which had been a favorite in the market, had a volatile period, with its shares falling 7%, then rising 13%, then falling 7% again in just three days.
On August 2, Intel fell more than 25%, the KBW index of U.S. bank stocks fell 8%, and Japanese bank stocks fell similarly.
Safe Havens Under Pressure
Traditional safe assets such as gold, the Japanese yen and US bonds have seen mixed reactions, says The Economist.
Gold, which typically acts as a hedge against market chaos, fell more than 2% on Aug. 2. The unusual drop suggests that investors may have sold gold to raise cash quickly to meet margin calls. Such forced selling could lead to further market instability, the magazine said.
Market panic factors
According to The Economist, there are major factors contributing to the current market turmoil:
- AI and Chip Industry Facts:
The realization that the AI sector, and particularly the chip industry, may not live up to the high expectations set during the previous market boom has emerged as a major cause of the turmoil.
Major tech companies like Alphabet, Amazon, Apple, Meta, and Microsoft released earnings reports that disappointed investors, leading to a significant decline in their stock prices.
The Economist noted that even Alphabet and Microsoft, whose revenues beat analysts’ expectations, saw their prices fall the day after reporting results, while Amazon, which missed expectations, faced harsher penalties from shareholders.
- US economic concerns:
The US economy is showing signs of weakness, with the unemployment rate rising to a three-year high of 4.3% in July, with just 114,000 jobs added, well below the 175,000 expected. This high unemployment and low job growth have raised fears of a possible recession.
“Traders have begun betting that the Fed will cut interest rates by half a percentage point at its next meeting in September to prevent this slowdown,” the newspaper said.
- Japanese Yen Strength:
The yen’s rapid strengthening, partly due to the Bank of Japan’s surprise decision to raise interest rates on July 31, has sent Japanese stocks tumbling. Trade unwinding, where investors borrowed at a low rate in yen to invest in higher-yielding assets, has added a new layer of market instability.
According to the magazine, the current market turmoil raises important questions about the future. The significant decline in gold prices and bank stocks is a major concern. Whether next week will see further declines depends on investor sentiment and behavior.
