In July 2024, the U.S. unemployment rate unexpectedly rose to 4.3% in July, far exceeding the market’s expectation of 4.1%, a figure that served as a trigger for the plunge in global stock markets. Signs of weakness in the U.S. job market triggered investor panic, and global stock markets fell almost across the board, especially in Asia and Europe. Meanwhile, a sharp drop in bond yields hinted that the Federal Reserve might cut interest rates earlier and more sharply. Investors’ fears of a recession intensified and market risk aversion surged, pushing safe-haven currencies such as the yen and the Swiss franc sharply higher.
U.S. jobs report triggers market jitters
The unemployment rate rose to 4.3% in July, the highest level since October 2021. The figure shocked the markets and far exceeded analysts’ forecasts of 4.1%. More importantly, the rise in the unemployment rate could signal a slowdown in U.S. economic growth, and weakness in the labor market could be a further drag on consumption and economic growth. With this, the market reassessment of the Fed’s monetary policy path. Analysts believe that the Fed may take more drastic measures to cut interest rates in the next few months. Futures markets show that investors expect the federal funds rate to fall to around 3% by the end of 2025, and the likelihood of a 50 basis point cut in September is already as high as 78%.
After the release of the employment report, the U.S. stock market opened with heavy losses, and technology stocks were particularly hard hit. The Nasdaq Index and the Standard & Poor’s 500 Index fell significantly, dragging global stock markets downward together. Global investors’ worries about the U.S. recession intensified, leading to panic selling in global capital markets.
Global stock markets hit hard
By the U.S. economic data dragged down, the global stock markets on the day almost no one was spared. Tokyo Stock Exchange’s Nikkei 225 index plunged 12.4%, the biggest one-day drop since the 1987 “Black Monday”. Taiwan’s stock market fell 8.4%, the largest one-day drop in 24 years. Stocks in South Korea, Indonesia and the Philippines also fell sharply, down 8%, 2% and 3% respectively. In Singapore, stocks fell 4.9%, the worst trading day in four years.
European stock markets were not spared, and were hit hard at the opening bell. France’s CAC 40 index fell 2.14%, hitting its lowest level since November; Germany’s Frankfurt stock market tumbled more than 3%, Paris stock market fell 2.6%, and London’s stock market fell 2.3%. Even the fall in Chinese stocks was not exempt from the negative sentiment in global markets, with Hong Kong’s Hang Seng Index down 1.8% and the Shanghai Composite Index down 1.1%.
Bond and Money Market Reaction
The reaction in the U.S. bond market was equally sharp, with the July jobs report raising expectations for a Fed rate cut. Bond yields fell sharply as investors’ fears of a recession intensified, with short-term bond yields in particular seeing significant declines. This change indicates that the market expects the Fed to adopt a more accommodative monetary policy in response to a possible economic slowdown. Meanwhile, risk aversion pushed the Japanese yen and the Swiss franc sharply higher, with the Swiss franc gaining 1.07% against the dollar.
However, gold, as a traditional safe-haven asset, failed to benefit from the promotion of risk aversion, and the price instead fell by 0.5% to $2,431 per ounce. Analysts believe that this may be related to market expectations that the Federal Reserve will adopt a policy of interest rate cuts, resulting in a weakening of the safe-haven appeal of gold.
The Bank of Japan unexpectedly raised interest rates to aggravate market turbulence
In addition to the U.S. employment data, other factors have also added to the market’s uneasiness. The Bank of Japan’s unexpected rate hike initiative announced last week triggered a sharp reaction in global financial markets. As the Bank of Japan’s rate hike broke the long-term low interest rate policy, arbitrage trading in the market was hit, leading to intensified capital flows and a sharp appreciation of safe-haven currencies such as the Japanese yen and the Swiss franc. The plunge in the Japanese stock market became one of the triggers for the downward spiral of global stock markets.
Analysis suggests that the rally in the Japanese stock market, especially after 2023 broke through the 1989 bubble-era highs, was seen by many as a symbol of Japan’s economic recovery. However, the current market plunge has exposed latent risks in Asian markets and raised doubts among investors about the real growth potential of the Japanese economy.
Middle East tensions exacerbate market volatility
In addition to the changes in economic data and monetary policy, the turmoil in the international situation has also added to market jitters. Recently, tensions in the Middle East have heated up, with threats against Israel by Iran and its allies adding to market concerns. Conflict in the Middle East could affect global energy supplies, triggering higher oil prices and increasing volatility in global markets. The market’s heightened sensitivity to the situation in the Middle East has further aggravated risk aversion.
Conclusion: Uncertainty about the global economic outlook
The plunge in global stock markets reflects investors’ high level of uncertainty about the global economic outlook. Signs of a slowdown in the US economy and expectations of a possible interest rate cut by the Federal Reserve have put global capital markets into a state of high alert. Asian equities are particularly vulnerable, with markets facing additional downside risks in the face of the challenges posed by a strengthening yen, a weakening U.S. economy and global uncertainties.
While the Fed’s rate cut may provide some relief to the market, the possibility of a global recession in the long term remains non-negligible. Investors need to remain vigilant and cautious in dealing with the current uncertain market environment. Meanwhile, the instability of the international situation is also an important factor in the turbulence of the global stock market, especially against the backdrop of the continued escalation of tensions in the Middle East, and market volatility is likely to intensify in the future.
