The red color dominated the performance of the world’s stock markets yesterday, Monday, while cryptocurrencies declined sharply in light of the declines recorded by Wall Street at the end of last Friday’s session.
Market conditions yesterday and today
- US stock indices fell at the end of trading yesterday as follows:
- The Dow Jones Industrial Average fell 2.6% to 38,703 points.
- The broader Standard & Poor’s 500 Index fell 3% to 5,186 points.
- The Nasdaq fell 3.43% to 16,200 points.
- As for the Asian stock exchanges, their performance was as follows at the end of trading on Tuesday:
- Japan’s Nikkei index rose 10.23% to 34,675 points at the close of trading on Tuesday, after falling 12.4% on Monday, its biggest decline since 1987.
- Hong Kong’s Hang Seng Index was down 0.15% at 16,671 points at the time of writing, after falling 1.46% yesterday.
- The Shanghai Composite Index rose 0.23% to 2,867 points after falling 1.54% yesterday.
- India’s Sensex rose 0.43% to 79,029 points at the time of writing, after falling 2.79% yesterday.
- The Singapore index was down 0.74% at 3,220 points at the time of writing, after falling 4.07% yesterday.
- The Arab indices were no exception, as they declined at the end of trading yesterday as follows:
- Dubai’s index plunged 4.5%, its biggest daily drop since May 2022.
- In Abu Dhabi, the index closed down 3.4%.
- The main Egyptian index closed down 2.33% at more than 27,840 points.
- The Saudi index closed trading down 2.1%, its lowest closing level since mid-December.
- Bitcoin rose 5.9% to $56,027 after falling 6.3% on Monday.
- Ethereum rose 7.7% to $2,526 after falling 11% yesterday.
- BNB rose 11.8% to $491 after falling 6% yesterday.
- The combined market cap of cryptocurrencies rose more than 7% to $2 trillion after falling 7.76% yesterday.
What happened?
These declines were attributed to a decline in the Wall Street stock market due to weaker-than-expected US economic data.
The US Labor Department reported last Friday that the unemployment rate rose to 4.3%, as employers added 114,000 jobs in July, a weaker-than-expected performance.
With the unemployment rate now at its highest level since emerging from the pandemic-induced recession in 2021, economists, banking analysts and investors have warned that signs of a recession are becoming more apparent.
Financial markets on Friday reflected concerns that the Federal Reserve had missed an opportunity to save the economy from a downturn by sticking to cutting interest rates.
Wage growth also slowed significantly in July, rising 0.2% from the previous June, and by 3.6% over the past year, the slowest growth since May 2021.
Wall Street analysts are beginning to see that if the Fed does not intervene in the coming days by announcing a cut in interest rates, the US economy could fall into recession.
The next Fed meeting will be on September 17, at a time when interest rates are currently in the range of 5.25% to 5.5%, the highest level in 23 years.
US central bank opinion
But Chicago Federal Reserve Bank President Austan Goolsbee says the U.S. economy does not appear to be in recession, despite weaker-than-expected employment data on Friday.
However, Federal Reserve officials must accommodate market changes to avoid over-tightening interest rates, Goolsbee added in an interview with CNBC.
Is it a tech stock bubble burst?
Writer and economic researcher Mounir Younes agrees with him that the current declines are due to the bursting of the technology stock bubble in the markets, especially those stocks that bet heavily on artificial intelligence revenues.
He told Al Jazeera that the revenues and profits of these companies are not commensurate with the large jumps in their share prices during the past periods.
Investors are fleeing negative economic data such as the current state of overpriced stocks such as Nvidia, Google, Microsoft and SoftBank, as recent trading has shown, Younis added.
He pointed out that there are expectations on Wall Street that the Federal Reserve will reduce interest rates to push the economy forward, especially since inflation is approaching the target rate, but the geopolitical climate and the Israeli war on Gaza and its repercussions are creating a state of uncertainty, as a result of which the Federal Reserve is waiting for the economic vision to stabilize before reducing interest rates.
He explained that investors are now fleeing from US bonds to the Japanese yen and the Swiss franc as safe havens from what is currently happening on Wall Street, but he indicated that the biggest escape is from technology stocks in the United States and from banking stocks in Europe.
Japan interest rate hike
Market strategist Jad Hariri adds another dimension to the market declines, saying that what is happening is a shock in the global financial markets after Japan raised interest rates by 0.25% from zero, which led to the exit of investments in various stock sectors to bonds and their returns.
Hariri pointed out, in an interview with Al Jazeera Net, that the American economic data played a role in pressuring the markets, especially after keeping interest rates at high levels for a long time, expecting interest rates to be reduced by 0.5% by next September.
For his part, Asim Mansour, chief market strategist at Orbex, says that among the reasons for the large declines in the markets are the negative results in the US technology sector companies, referring to Intel and Nvidia, for example.
He added to Al Jazeera Net that what was happening in the markets was expected, but its timing was not known, pointing to the impact of raising the US interest rate on economic growth and stock trading, which is the same factor that could create a state of optimism in the markets with the interest rate being reduced by 0.5% next September, according to what is expected by the markets.
Asim Mansour disagrees with the view that the AI bubble has burst, but he said that a return to fair values in AI stocks may occur in the coming period.
Contribute base
On the other hand, the performance of US stocks led to the activation of the “Sahm rule”, which is a usually reliable indicator of economic recession.
The Sahm rule was created by former Federal Reserve and White House economist Claudia Sahm, and states that the U.S. economy enters a recession when the 3-month average unemployment rate is 0.5% or more above its lowest level in the previous 12 months.
This “purely empirical” indicator, which lacks a “theoretical basis”, as Florian Elbow, head of macroeconomic research at Lombard Odier IM, recalls, reached 0.53% in July 2024.
The expert explains that since the release of the US unemployment report last Friday, which rose more than expected to 4.3%, the highest unemployment rate since October 2021, markets have “clearly concluded that we will see a recession” and are plunging into the red.
Is the US economy in recession?
But despite these numbers, Claudia Sahm herself doubts the effectiveness of her index this time, saying in an interview with Fortune magazine published last Friday, “I don’t think we are currently in a recession.”
“No one should panic now, even if it seems that way to some,” she added, because there are leading indicators for the economy that “still look very good.”
Sahm noted that household income continues to grow, while consumption and business investment remain resilient, adding, “This time may be different.”
The research group Capital Economics noted that the rise in the unemployment rate had so far been driven by an increase in the workforce rather than a decline in employment.
“This is a departure from previous cycles,” Neil Shearing, the group’s chief economist, said in a note. “Hurricane Beryl likely contributed to the weaker payrolls figures in July.”
Federal Reserve Chairman Jerome Powell also sought to reassure investors, saying at a conference last Wednesday that the “contribution rule” is a “statistical regularity” and “not an economic rule that says something is going to happen.”
The Federal Reserve decided last Wednesday to keep interest rates at their highest level in 20 years, but indicated the possibility of reducing them next September.
Benefit
Concerns have increased that recessionary pressures will force the Federal Reserve to cut interest rates more than expected, or even before its next meeting.
Jerome Powell made his remarks before the unemployment figures were released.
“This is clearly something that the Fed will be concerned about,” said Florian Elbow, head of macroeconomic research at Lombard Odier IM.
“Is it possible for the Fed to cut interest rates unplanned? At the moment, that is unlikely to happen,” the economist adds.
Some analysts expect the Federal Reserve to cut interest rates by 0.5% in September.
Elbow estimates that the Fed may make such a cut “to slow the market downturn if it really continues until then.”
