Asian shares plunge as traders brace for global volatility

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Japanese shares fell sharply on Monday, sending the country’s main indexes to a third straight session of steep losses as global markets trembled at the prospect of a U.S. recession.

In a sell-off that followed declines across other Asian markets, Japan’s Topix index fell as much as 7.3 percent, while the Nikkei 225, which saw its biggest one-day drop since the 1987 crisis on Friday, fell 5.9 percent.

Traders in Tokyo said the sell-off in Japan is likely to continue in Europe and the United States. Investors are bracing for fresh volatility amid concerns that the Federal Reserve has been too slow to react to signs that the U.S. economy is cooling and may be forced to cut interest rates.

Tokyo traders said the selling was part of a broader correction and risk-off move by global funds. But there were Japan-specific factors at play that weighed on Tokyo stocks, particularly the earnings impact of the yen, which has risen about 9 percent from around 161 yen to the dollar in mid-July to 145.60 yen on Monday.

“The Japanese market is seen by global investors as a hedge against global trade,” said the Japan head of a global pension fund. “So if you are in a serious risk-off mode, as many investors are at the moment because of concerns about a US recession and geopolitics, it makes sense to take profits in a Japanese market that has done so well this year.”

The sell-off in Japan was also reflected in other Asian markets. South Korea’s benchmark Kospi index fell more than 4 percent in early morning trade, while Australia’s S&P/ASX 200 fell nearly 3 percent.

Weak US jobs data on Friday added pressure to an already hard-hit market. Investors are leaving expensive tech stocks.with the Nasdaq falling into correction territory last week and Treasury bonds rallying.

“The story really changed overnight,” said Torsten Sl.øk, chief economist at Apollo. Investors are weighing whether Friday’s jobs data should be viewed as a statistical oddity or whether the U.S. is “now in a more serious recession,” he added.

The Fed left interest rates unchanged at its meeting last week, but the market’s severe reaction to the jobs data suggests investors believe the central bank may have made a mistake in not cutting rates.

JPMorgan economists joined a chorus of Wall Street strategists over the weekend calling for the Fed to cut interest rates by half a percentage point at its next two meetings in response to emerging signs of weakness.

Srini Ramaswamy, managing director of U.S. fixed income research at JPMorgan, wrote on Saturday that he has turned “bullish on volatility” due to uncertainty about the path of interest rates and a lack of liquidity in the summer as new investors feel.

The Vix index, a gauge of expected volatility in the US stock market – often referred to as Wall Street’s “fear gauge” – surged as high as 29 points on Friday, its highest level since the US regional banking crisis in March last year.

The sell-off that began in big tech stocks with high valuations, many of which reported earnings last week, spread further after the Fed decision and the jobs data.

The tech-heavy Nasdaq Composite ended the week down 3.4 percent and has fallen more than 10 percent since its all-time high in July. Treasuries rose, with the yield on the 10-year U.S. bond hitting its lowest level since December at 3.82 percent.

On Saturday, Warren Buffett’s Berkshire Hathaway be revealed that it halved its stake in Apple in the second quarter, while increasing its cash pile to a record $277 billion and buying Treasury bonds.

Investors are betting that the Fed will cut borrowing costs by more than a percentage point by year-end to counter a weakening economy.

“I think rates are too high,” said Rick Rieder, global chief investment officer of fixed income at BlackRock. While the economy remains “relatively strong,” the Fed needs to raise rates to around 4 percent “sooner rather than later,” Reider said.

However, Diana Iovanel, senior markets economist at Capital Economics in London, argues that “equity valuations are still far from pointing to an economic disaster”.

“Renewed concerns about a US recession have increased the likelihood of further Fed rate cuts. But we don’t think the US economy will hamper equity gains for much longer,” she added.