Stock market crash due to speculation and fear of recession

Fears of a recession in the United States combined with speculative movements by large investors who for years took advantage of near-zero interest rates in Japan to make huge profits in the stock and currency markets. Yesterday, the highest alerts were raised in response to the collapse of the stock and currency markets, mainly in emerging markets.

In addition, the escalation of geopolitical tensions exacerbated investor nervousness.

The epicenter of volatility in global markets was Japan, in a context marked by the readjustment of operations of carry trade on an international scale, which is why the world’s main stock markets ended lower.

For years, investors borrowed yen at rock-bottom interest rates and used these loans as leverage. Investors could convert these yen into U.S. dollars or other currencies to buy stocks and currencies and make huge profits. This strategy is known as carry tradeand again low rates made it possible.

The Bank of Japan last week raised interest rates to control inflation and is expected to continue doing so. The market does not believe the Japanese economy can handle higher rates as they have been near zero for decades, analysts said.

Following this action, the sharp rise of the Japanese yen against the US dollar has triggered a surge in selling, as speculators who had borrowed money at Japan’s near-zero interest rate to buy US risky assets have been liquidating their holdings, thus sending stock markets into decline.

Actions pale

The source of Monday’s volatility was Japan’s Nikkei 225 index, which plunged 12.4 percent, its worst day since 1987. It was the first chance for traders in Tokyo to react to Friday’s U.S. jobs report, where the pace of hiring slowed much more in July than economists had expected.

The screen of the Mexican Stock Exchange building shows the dollar and yen quotes after the fall of the Japanese stock market. Photo Pablo Ramos

Following this report, the market considered it even more likely that the Federal Reserve will be more decisive in lowering interest rates in September, as it is feared that the landing of the US economy will not be as soft as predicted, but rather more abrupt due to the high interest rates that were used to alleviate inflation, which reached over 9 percent.

The S&P 500 lost 3 percent yesterday to end at 5,186.33 points, its biggest drop since September 2022, and hit its lowest level since May 2022.

The Nasdaq fell 3.38 percent to 16,208.38 points. Stock indices pared losses after the monthly US services indicator slightly exceeded forecasts for a rebound into expansion zone (50 points). Some of the largest companies on the stock market saw their shares fall.

Meanwhile, the VIX index, also known as the fear indexhit its highest level since the pandemic, rising more than 40 percent during the session.

The VIX is a real-time volatility index designed by the Chicago Board Options Exchange and serves to measure market expectations.

Oil prices fell on Monday in volatile trading, as sharp declines in global stock markets were offset by fears that Iran’s retaliation for the killing of a Hamas leader in Tehran could spark a wider war in the Middle East.

Meanwhile, Brent crude futures fell 0.66 percent to $76.30 a barrel, after trading near their lowest levels since January. U.S. West Texas Intermediate (WTI) crude lost 0.79 percent to end at $72.94. The Mexican blend closed at $67.87 a barrel.