The deepening stock market rout on Wall Street and around the world could lead to interest rates being cut more sharply, as the US Federal Reserve considers holding an emergency meeting.
Japan's and Taiwan's stock market benchmarks plummeted over 12% and 7% respectively as traders scrambled to re-price investments for the possibility of a US recession, following a disappointing US jobs report on Friday and a rate hike by the Bank of Japan last week.
Bond markets also raised the odds of a potential US interest rate cut, with traders pricing in around a 60% chance of an emergency quarter-point cut by the Fed within the coming week.
While not calling for an emergency Fed cut, several investment banks brought forward their predictions of when the first cut will come, with almost all expecting a move in September.
One of them was Bank of America, whose economists said: “The bottom line is that the weaker-than-expected July employment report led us to change our baseline expectation for the first Fed cut from December to September."
Market prices for Fed cuts in 2024 increased from 82 basis points to 111 basis points, which is more than four quarter-point cuts by the end of the year, with the September meeting priced for 41bps of cuts.
Last week the yield on a two-year Treasury bond fell half a percentage point to below 3.9%, below the Fed’s 5.3% benchmark rate for the first time since the global financial crisis.
The dollar index (DXY) tumbled 0.8% to its lowest since December, with the dollar down 5% against the Japanese yen in recent days, 1.5% lower versus the euro to a five-month low, and down 0.6% against the pound.
Analysts at Rabobank said: "The weak US employment data has clearly triggered a very significant market reaction on the back of recession fears and the anticipation of Fed rate cuts."
Economist Kallum Pickering at Peel Hunt said: "Market corrections are normal and healthy. However, the speed at which the growth scare and loss of confidence seems to be reverberating through markets probably justifies a verbal intervention by the Fed.
"But the economic data on their own do not yet justify any emergency action - such as an unplanned inter-meeting cut in the Funds Rate."
One calling for an emergency cut from the Fed was Nigel Green, CEO of deVere Group.
He says: "The Federal Reserve needs to start easing monetary policy more aggressively than had been anticipated in order to head off a looming recession in the world’s largest economy."