Global markets mostly recouped Monday’s losses as recession fears mostly subdued.
After Monday’s bloodbath, global markets mostly rebounded with recession fears subdued for the moment. Yesterday, stock exchanges around the world experienced a multi-year record drop, with some double-digit losses in major markets.
Over $2 trillion was wiped out from American stock exchanges yesterday. The steep drop prompted some speculation that the Federal Reserve may summon an emergency meeting. The last time this happened was at the onset of the COVID-19 pandemic.
On Tuesday, however, a general buyback brought things back to normal. Tokyo’s Nikkei increased 10.23% after yesterday’s 12.40% loss. The US Dow Jones and NASDAQ 100 jumped by 1.20% and 1.90% respectively. The S&P 500, an index following the US’s 500 largest companies, rallied by 1.76% on Tuesday morning.
The crisis, for the moment, seems averted. The drop seemingly only corrected the severe overvaluation of some market trends, including interest rates and AI technological developments.
The negative conjunction began last week when big tech companies released their quarterly earnings and the Federal Reserve kept interest rates stable.
Tech firms like Alphabet, Microsoft, and Amazon are heavily invested in AI research and development, but their latest earnings show costs may be higher than Wall Street was hoping.
The hype over artificial intelligence caused the strongest S&P 500 growth in recent decades, mostly driven by “Magnificent 7” tech stocks.
Moreover, markets have waited for the Fed to cut rates since early 2024. Its decision to postpone the first cut to September ignited fears of a US recession.
“This looks like a healthy, long-overdue market correction,” Antonio Cavanero, head of investments at Generali Asset Management, told the Financial Times. “The pockets of pain are in those trades that were based on cheap funding in the Japanese yen space and in tech.”
Fear of recession overblown
The word “recession” made headlines yesterday as investors were worried interest rates have remained too high for too long. The Federal Reserve raised rates to a 23-year high of 5.25-5.5% in July 2023 and has kept them at this level since then.
However, with inflation on an apparently stable path to 2% (the Fed’s target) and the US economy starting to feel pressure, markets believe rates should start coming down.
Unemployment rose slightly in recent months to 4.3%, and Q2 GDP growth was slower than the same period last year.
Nevertheless, a September cut looks perfectly timed for most analysts. Despite what markets may believe, the economy is doing fine and there is no rush to cut interest rates. Atlanta Federal Reserve predicts a 2% GDP growth in the current quarter, and unemployment is still close to all-time lows.
Most economists ruled out an emergency cut to “calm” markets. “If the Fed did an emergency cut, that would communicate panic,” Yale economics professor Ernie Tedeschi said.
