U.S. Investors Shift Focus to Hard Landing Scenario as World Markets Lower Expectations

Alexander Garcia
05 Aug, 2024
Miami

Stock market indexes on Wall Street dropped sharply in Monday's trading and extended weekly  losses of the previous three weeks in a row. 

The global market sell-off that originated last week reverberated on Wall Street on Monday as investors recalibrated their economic growth and corporate earnings outlook. 

The S&P 500 index and the Nasdaq Composite dropped around 3%, but at the opening, the benchmark indexes plunged as much as 4.5% and 6.5%, respectively. 

Only two weeks ago, investors rushed to congratulate the Federal Reserve as policymakers struggled to cool inflation while keeping economic growth intact—the so-called soft landing. 

However, market sentiment reversed sharply after key economic indicators suggested weakening economic activities and labor market expansion, suggesting that the economy may be losing steam faster than previously anticipated. 

The hoped-for soft-landing scenario has been been discounted to a hard-landing scenario as investors fear economic activities may be falling at a faster-than-previously estimated pace. 

The sudden shift in the economic narrative caught investors off guard and set in motion a decline on Wall Street last week, which rippled to Asia and Europe with heightened amplitude. 

In Monday's trading, last quarter's big winners linked to artificial intelligence plunged in high double-digits, setting another round of sell-off across the Atlantic. 

Intel, Nvidia, Broadcom, Qualcomm, AMD, and TSMC plunged between 5% and 15% at the opening, but those losses were trimmed after an hour of trading. 

The yield on 10-year U.S. Treasury notes slipped to 3.7% as investors sought a safe haven in bond markets as stock market indexes hit new lows in the last two weeks. 

In overnight trading, Japan's Nikkei plunged 12.4%, the largest point decline in the index's history and the second-largest fall in percentage, after the Bank of Japan lifted rates that contributed to a sharp rebound in the yen. 

In the week ahead, in the U.S., all eyes will be on the fresh batch of earnings, including updates from Amgen, Caterpillar, Disney, and Uber.

On the economic front, the service sector activity report is likely to show a rebound in growth in July after a contraction in June.

Investors are also awaiting the release of the international goods and services trade balance, and changes in the deficit with China will take center stage.

 

U.S. Indexes and Treasury Yields

The S&P 500 index is down about 9%, and the Nasdaq Composite has dropped by 14% from its recent high in early July. 

The S&P 500 index decreased 2.7% to 5,199.27, the Nasdaq Composite fell 3.1% to 16,252.99, and the Russell 2000 index declined 3.0% to 2,046.74. 

The yield on 2-year Treasury notes edged lower to 3.87%, 10-year Treasury notes decreased to 3.70%, and 30-year Treasury bonds decreased to 4.03%.

WTI crude oil decreased $0.39 to $73.13 a barrel, and natural gas prices edged down 2 cents to $1.94 a thermal unit.

Gold decreased by $50.42 to $2,392.42 an ounce, and silver declined by $1.36 to $27.17. 

The dollar index, which weighs the US currency against a basket of foreign currencies, edged lower to 102.52.

 

U.S. Stock Movers 

Artificial intelligence-linked stocks rebounded from steep losses on Monday morning. 

Nvidia declined 6.5% to $99.23, Qualcomm dropped 0.5% to $158.14, TSMC decreased 5.1% to $142.30, but AMD managed to shake off losses to rise above the flatline to gain 0.5% to $133.25. 

Apple decreased 5.4% to $207.97 after Warren Buffett-controlled Berkshire Hathaway disclosed in regulatory filings that it had cut its holding in the company by half. 

Tesla declined 5.4% to $196.40, and company founder Elon Musk revived a lawsuit against OpenAI and its founder, Sam Altman. 

 

European Stock Markets Extend Losses On Monday as Global Sell-off Intensifies 

European markets extended losses from last week as investors adjusted their global growth outlook amid a weakening economic backdrop. 

Benchmark indexes in Paris, Frankfurt, and London dropped between 2% and 4% as weaker-than-expected earnings from mega-cap tech companies were compounded by the weakening economic drop in the U.S. 

Large European companies relied on export growth to the U.S. and China, which is the main driver of earnings growth, because of the stagnant economic conditions in the European Union. 

However, in recent quarters, most of the earnings growth has been driven by U.S. demand growth, offset by China's weaker-than-expected economic recovery. 

Now if the U.S. economy weakens, that could severely impact demand for European industrial and luxury goods, providing another headwind for earnings at European companies. 

In domestic economic news, a survey showed the eurozone economy stalled in July as demand for goods and services deteriorated. 

The HCOB composite PMI output index fell to a five-month low of 50.2 from 50.9 in June, S&P Global reported Monday. 

In the week ahead, investors are awaiting the release of German factory orders and industrial production data, both of which are expected to show a rebound, and final inflation data is expected to confirm acceleration in July.

In the eurozone, investors are looking forward to the release of retail sales and producer price indexes, industrial production in Spain, the unemployment rate in France, and an inflation update in Italy. 

 

Europe Indexes and Yields

The DAX index decreased by 1.8% to 17,339.0; the CAC-40 index fell by 1.4% to 7,148.99; and the FTSE 100 index declined by 2.1% to 8,008.23.

European bond yields dropped to six-month lows as investors sought safety in government securities amid growing worries about the global economic slowdown and rising geopolitical tensions. 

The yield on 10-year German bonds edged lower to 2.10%, French bonds inched lower to 2.92%, the UK gilts inched lower to 3.77%, and Italian bonds decreased to 3.62%.

The euro edged down to $1.09; the British pound inched lower to $1.272; and the U.S. dollar weakened to 85.05 Swiss cents.

Brent crude decreased $0.56 to $76.24 a barrel, and the Dutch TTF natural gas fell by €0.85 to €35.80 per MWh.

 

Europe Stock Movers

Clarkson PLC plunged 10.4% to 3,875.0 pence after the UK-based shipping broker reported a decline in sales and earnings in the first half. 

OCI NV increased 10.3% to €23.82 after Woodside Energy agreed to acquire the Netherlands-based chemical maker's clean ammonia plant in Texas for 2.35 billion. 

Woodside Energy decreased 2.5% to 1,302.0 pence. 

Senior plc plunged 7.7% to 145.4 pence, despite the UK-based engineering company reporting a 10% increase in its first-half profit. 

Aurubis AG rose 9.2% to €62.50 after the non-ferrous metal producer and copper recycler reported third-quarter operating earnings below market expectations. 

Galderma AG increased 4.6% to CHF 70.09 after L'Oreal said it acquired a 10% stake in the dermatology company for an undisclosed amount. 

 

Japan's Nikkei Records Largest Single-day Fall of 12% Amid Panic Selling 

Market indexes in Tokyo plunged in Monday's trading steepened three-day losses amid a growing list of worries as investors adjusted to the hawkish central bank.

The Nikkei 225 stock average plunged more than 12% and extended three-day losses to 20% as the Bank of Japan unexpectedly increased interest rates and sparked a sharp reversal in the Japanese yen. 

Last Thursday, the Bank of Japan increased interest rates for the second time since March by 15 basis points to 0.25% and held out for more interest rate increases in the imminent future. 

Investors were also under pressure after a string of weak earnings from mega-cap U.S. technology companies, which also led to the unwinding of the artificial intelligence-linked rally, dragging semiconductor equipment makers. 

The yen continued to advance for the second week in a row and strengthened as much as 4% to close at 142.45 against the U.S. dollar, a sharp jump from 162 only three weeks ago. 

The minutes of the Bank of Japan's policy meeting held on June 13–14 indicated members noted modest economic recovery, and participants decided to delay the release of a detailed bond purchase program until the next meeting. 

The yield on 10-year Japanese government bonds dropped to 0.775% from 1.07% in Friday's trading. 

 

Japan Stock Movers 

The Nikkei 225 stock average recorded the largest decline in points in the index's history, and registered the second largest decline in percentage terms.

The Nikkei 225 stock average declined 3,836 points on October 20, 1987, the day after following the sharp plunge on Black Monday in New York.  

The Nikkei 225 stock average plunged 12.4% or 4,451.28 points to 31,458.42, and the Topix index declined 12.2% to 2,227.15. 

Banks, technology stocks, and industrial and automotive stocks led the decliners for the second day in a row. 

Mitsubishi UFJ Financial plunged 17.8% to ¥1,245.50, Sumitomo Mitsui Financial dropped 15.5% to ¥8,162.0, and Mizuho Financial fell 19% to ¥2,452.0. 

Over the last three trading sessions, Mitsubishi UFJ declined 33%, Mitsui Financial plunged 20%, and Mizuho Financial chopped 27%. 

Softbank Group plunged 19% to ¥6,400.0, Advantest Corp. slid 15.5% to ¥5,313.0, and Screen Holdings dropped 12.7% to ¥9,080.0. 

Over the last three trading sessions, Softbank plunged 31%, Advantest dropped 22%, Tokyo Electron decreased 25%, and Screen Holdings decreased 27%. 

Toyota Motor declined 13.5% to ¥2,232.0, Honda Motor decreased 17.5% to ¥1,251.50, and Nissan Motor fell 14.5% to ¥378.10. 

 

China Indexes Sell-off Erases 2024 Gains Amid U.S. Recession Worries 

Market sentiment continued to weaken in Shanghai and Hong Kong as fears of the U.S. recession grew. 

The Hang Seng index declined nearly 3% and dropped to a 3-month low, and the CSI index fell, tracking losses in Asia. 

Investor sentiment deteriorated after a string of U.S. economic data suggested that the economy may be heading into a recession, reversing the popular narrative of strong consumer spending and business investments. 

The U.S. payrolls expanded at the slowest pace in several years in July, and the jobless rate rose for the fourth month in a row to 4.3%, indicating labor market conditions are moderating. 

In addition, last week, factory activities shrank for the third month in a row, and initial jobless claims approached a one-year high. 

The sudden reversal in market sentiment from soft landing to hard landing was further supported by weak earnings from Intel, Amazon, Alphabet, and Tesla. 

Investors are now thinking that the Federal Reserve may have held interest rates too high for too long and that the central bank may lower rates sooner than expected. 

Closer to home, China's service sector showed an improvement in July, driven by an acceleration in export demand and rising employment, according to a private survey. 

The Caixin China General Services PMI increased to 52.1–51.2% in June, according to a survey released by S&P Global. 

 

China Stock Movers 

The Hang Seng index declined 2.6% to 16,512.61, and the CSI 300 index dropped 1% to 3,352.63. 

Internet stocks were among the leading decliners amid worries of a further weakening in earnings. 

Alibaba Group fell 2.2% to HK $73.65, Tencent Holding decreased 1.6% to HK $352.40, and Baidu plunged 4.2% to HK $80.05. 

Electric vehicle markets fell as investors avoided high-flying stocks. 

BYD declined 2.2% to HK $214.40, Li Auto fell 3.2% to HK $71.55, and Xpeng decreased 3% to HK $28.55. 

China Vanke declined 1.7% to HK $3.98, China Resources Land dropped 2.2% to HK $21.85, and Henderson Land Development eased 0.5% to HK $21.80. 

HSBC Holdings plc declined 5.3% to HK $62.15, and Standard Chartered plc plunged 6.2% to HK $68.15.