In a dramatic turn of events, US equity markets experienced a severe downturn on Monday, with indexes plummeting as investors reacted to the growing possibility of a substantial interest rate cut. Midday reports indicated an extreme scenario where the Federal Reserve may implement a staggering 100 basis-point reduction in rates as early as September.
This alarming speculation has led to increased market volatility and heightened fears of an impending recession. The Nasdaq Composite Index, emblematic of tech-heavy equities, witnessed a staggering fall, shedding more than 1,000 points intraday before rebounding to a 2.6% loss by the end of trading.
According to recent reports from Reuters, the tech sector, particularly the influential group known as the 'Magnificent Seven,' faced significant capital erosion, collectively losing around $900 million in market value. Prominent tech giants such as Nvidia and Apple spearheaded the sell-off, contributing to the tech sector's overall decline of 3.2%, the most significant drop among various industry groups. The S&P 500 index also succumbed to the bearish sentiment, retreating by 2.4% to settle at 5,220.3.
Similarly, the Dow Jones Industrial Average fell by 2.1%, closing at 38,885.4. The downturn was widespread, with all sectors suffering losses. Of particular note, consumer discretionary stocks recorded the second-largest drop, while financials weren't far behind, ranking third in the magnitude of their decline. Adding to the market's anxiety, the CBOE's Volatility Index (VIX), often referred to as the market's 'fear gauge,' surged by an astonishing 46% to reach 34.29, following an earlier 80% spike during the trading session.
Bitcoin also mirrored the risk-off sentiment, plummeting by 8% to $54,352. This decline occurred in conjunction with significant drops in global markets, where Japan's Nikkei index suffered a dramatic fall of over 12%, while key European indices, including the UK's FTSE 100, Germany's DAX, and France's CAC, each experienced losses of at least 1.3%. In a concerning analysis, a research note from D.A.
Davidson starkly highlighted that global stock markets faced unprecedented declines, likening the current situation to the infamous Black Monday of 1987, particularly illustrating the severity of downturns in Japanese shares as they crossed that historic threshold. The growing concerns regarding a potential US recession have triggered investor migration toward safer assets, exacerbating the negative pressure on stock values. The FedWatch Tool provided further insight into market sentiments, indicating an 11% probability of a significant 100 basis-point cut in interest rates for September.
This figure marks a dramatic increase in speculation compared to the preceding day and month, where expectations for such drastic measures were non-existent. Meanwhile, the likelihood of a 50 basis-point reduction surged to just under 90%, an increase from 74% a day prior and a mere 11% a week ago. Treasury yields continued their downward trajectory from the previous week, with the yield on 10-year government bonds decreasing by 3.7 basis points to 3.76%.
The two-year Treasury also fell, retreating 3.2 basis points to 3.84%. Further compounding the economic climate, West Texas Intermediate crude oil experienced a minor decline, dropping 0.8% to $72.95 a barrel. As the situation evolves, investors remain on edge, closely monitoring economic indicators and central bank responses that will shape the markets in the days to come..