Shares in chipmakers plummeted significantly on Monday amid a global market sell-off, with Japanese stocks plunging by more than 12% due to growing concerns over a potential U.S. recession.
The fears spurred investors to flee from riskier assets, betting that a series of swift rate cuts might be necessary to support economic growth.
Safe-haven currencies like the yen and Swiss franc saw substantial gains as investors unwound crowded carry trades, leading to speculation that some were selling profitable positions to cover losses elsewhere. The intensity of the sell-off triggered circuit breakers across Asian exchanges.
Semiconductor stocks, many of which enjoyed substantial gains in recent years driven by the AI boom, fell sharply in premarket trading Monday. The AI darling Nvidia (NASDAQ:NVDA) was down 9% at the time of writing, while Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Intel (NASDAQ:INTC) plunged 5%, 4% and 4.6%.
Apple Inc (NASDAQ:AAPL) lost 6.5%, Dell Technologies Inc (NYSE:DELL) tumbled 7.6%, and Meta Platforms Inc (NASDAQ:META) dipped 5%.
But the sell-off extends much beyond chipmakers, with Nasdaq 100 Futures futures tumbling 4.7%, and S&P 500 futures falling 2.8%, reflecting the global nature of the market turmoil.
EUROSTOXX 50 futures declined 2.1%, while FTSE futures slipped 1.2%. Japan's Nikkei dropped a staggering 12.4%, reaching seven-month lows, a level of decline not seen since the 2011 financial crisis.
The MSCI's broadest index of Asia-Pacific shares outside Japan fell 4.2%. Chinese blue chips, however, were relatively resilient, dipping only 0.5%, helped by a rise in the Caixin services PMI to 52.1.
Japanese 10-year bond yields fell sharply by 17 basis points to 0.788%, the lowest since April, as markets re-evaluated the likelihood of another rate hike from the Bank of Japan.
U.S. Treasury bonds were in high demand, with United States 10-Year dropping to 3.767%, the lowest since mid-2023. United States 2-Year decreased to 3.818%, and the yield curve could soon invert, a pattern historically associated with recessions.
The weak July payrolls report has led markets to price in a 78% chance that the Federal Reserve will cut rates in September by a full 50 basis points. Futures suggest a total of 122 basis points in cuts for the year, with rates expected to be around 3.0% by the end of 2025.
"We have increased our 12-month recession odds by 10pp to 25%," Goldman Sachs (NYSE:GS) analysts said in a note, adding that the risk is somewhat mitigated by the Fed's ability to ease policy.
The Wall Street bank now anticipates quarter-point cuts in September, November, and December.
"The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks. If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September,” analysts wrote.
JPMorgan (NYSE:JPM) was more pessimistic, assigning a 50% probability of a U.S. recession.
"Now that the Fed looks to be materially behind the curve, we expect a 50bp cut at the September meeting, followed by another 50bp cut in November," said the bank’s economists.
The significant drop in Treasury yields has overshadowed the U.S. dollar's typical safe-haven appeal, dragging the currency down 1.1% against a basket of major currencies. The dollar fell 2% against the yen to 143.10, while the euro dropped 1.9% to 156.35 yen. However, the euro held steady against the dollar at $1.0934.
Investors also increased bets that other major central banks would follow the Fed's lead and ease policy more aggressively, with the European Central Bank now expected to cut rates by 67 basis points by Christmas.
In the commodity markets, gold traded relatively flat at $2,431.62.