Stocks sink with bond yield and dollar on recession fears

US indexes pare steep losses after services data

By Reuters

Published: Mon 5 Aug 2024, 7:58 PM

Global equities suffered heavy losses on Monday as Wall Street joined a global stock rout that started in Japan while the dollar tumbled against the yen and US Treasury yields dropped on concerns about a recession in the United States.

Oil prices also fell in a volatile session on Monday, hit by recession fears, but declines were buffered by worries that escalating Middle East conflict could hit crude supplies.

CBOE’s volatility index, known as Wall Street’s fear gauge, pared gains and was last up 12.5 points at 35.98 after jumping 42 points earlier to 65.73, its highest level since March 2020, during the global COVID-19 pandemic.

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Earlier Japan’s benchmark Nikkei average had closed down 12.40 per cent for its largest one-day fall since October 1987.

A weaker than expected US payrolls report for July had started a Wall Street sell-off on Friday when investor bets for a Federal Reserve September rate cut had doubled to 50 basis points. The weak report on Friday had followed disappointing earnings updates from some megacap technology companies.

“It’s really a confluence of things,” said Eric Wallerstein, chief market strategist at Yardeni Research in Los Angeles.

He said everything from unwinding of yen-funded trades and the escalation of Middle East tensions to the disappointing US earnings updates and the weak US jobs report, played a role in the sell-off.

However US stocks pared losses somewhat after the Institute for Supply Management (ISM) said on Monday that services sector activity rebounded from a four-year low in July with rising orders and employment, easing recession fears.

Its non-manufacturing purchasing managers (PMI) index rose to 51.4 from 48.8 in June, ahead of economist expectations for 51.0. A PMI reading above 50 indicates growth in services, which accounts for more than two-thirds of the US economy.

On Wall Street, the Dow Jones Industrial Average was down 1,090.72 points, or 2.74 per cent at 38,646.54 at 10:40 a.m. (1440 GMT). The S&P 500 lost 165.63 points, or 3.10 per cent, to 5,180.93 and the Nasdaq Composite lost 590.17 points, or 3.52 per cent, to 16,185.99.

MSCI’s gauge of stocks across the globe fell 26.19 points, or 3.33 per cent, to 761.02 after earlier hitting a low of 756. Europe’s STOXX 600 index was down 2.29 per cent.

In US Treasuries, yields dropped to more than one-year lows and a closely-watched part of the Treasury yield curve turned positive for the first time in two years on increasing concerns that the U.S economy may be heading into a recession.

The yield on benchmark US 10-year notes fell 2.3 basis points since late Friday to 3.773 per cent, while the 30-year bond yield fell 3.4 basis points to 4.0772 per cent.

The 2-year note yield, which typically moves in step with interest rate expectations, rose 0.9 basis points to 3.8811 per cent.

In currencies, the Japanese yen surged to seven-month highs against the dollar as traders aggressively unwound carry trades interpreting last week’s US economic data as raising the prospects for a US recession and steeper Fed rate cuts.

The dollar index, which measures its performance against a basket of currencies including the yen and the euro, fell 0.53 per cent to 102.60. The euro was up 0.5 per cent at $1.0962.

Against the Japanese yen, the dollar weakened 2.12 per cent to 143.44.

In energy markets, US crude lost 0.71 per cent to $73 a barrel and Brent fell to $76.39 per barrel, down 0.55 per cent on the day.

In precious metals, gold appeared to lose some of its safe haven appeal. Spot gold lost 1.98 per cent to $2,394.99 an ounce. US gold futures fell 1.51 per cent to $2,389.00 an ounce.