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The week has started on a negative note: the Korean KOSPI is down almost 9%, the Turkish BIST100 is down 7% before halting trading, and the Japanese Nikkei has plunged 12.4%.
The turbulence is not due to Mercury retrograde or a new escalation in the Middle East that could lead to a major conflict. However, that certainly does not boost investor confidence.
A significant factor behind the current panic – we are seeing a lot of emotional selling – was previously seen in a more positive light, especially for the S&P 500.
We refer to the current slowdown in the US labor market. According to the July BLS report, job growth (114,000) came below expectations (175,000), and unemployment has risen.
This has sparked debates about a possible recession. Some even argue that we could already be in one and that the Fed was too late to cut rates, so things could worsen.
Against this backdrop, speculation is rife that the Fed may call an unscheduled meeting to cut interest rates to help stabilize markets. The question remains whether it will happen.
It is also unclear whether it will help calm markets, given that “panic is hard to gauge,” so it could either end or continue. In this sense, investors should remain cautious.
Another factor contributing to recent market corrections may be that investors have finally realized that technology stocks, especially those related to AI, may be overvalued.
Finally, the Bank of Japan’s hard-line stance has led to the end of carry trades, where investors used borrowed yen to buy other assets, mainly shares of US tech companies.
Can the fall continue?
There is always room for further correction. As for what might trigger it, among the weak macroeconomic data is another deterioration in the geopolitical situation.
It is worth recalling that last week, the Islamic Revolutionary Guard Corps (IRGC) declared that Iran would respond “at the right time and in the right place” to Israeli attacks.
