Investors have ramped up bets that the US Federal Reserve will be forced into an emergency interest rate cut to support the economy as fears of recession grow.
A stock market sell-off that began on Wall Street on Friday spread around the world on Monday, with heavy selling from Tokyo to London.
Shares plunged and bonds rallied amid growing fears that the world’s biggest economy is heading for recession and concern that an AI-fuelled stock bubble has burst.
The tech-heavy Nasdaq Composite plummeted by as much as 6.4pc as Wall Street opened - its worst daily drop since the start of the pandemic - extending losses after a 2.4pc drop on Friday. The broader S&P 500 sank by as much as 4.2pc.
Losses were pared back as the session went on, but the Dow and Nasdaq still closed down 2.6pc and 3.4pc respectively.
It followed sharp sell-offs in Europe earlier in the day, where the FTSE 100 closed down 2pc to register its biggest drop in more than a year. Overnight, Japan’s stock market suffered its heaviest loss since 1987.
The panic began at the end of last week after weaker-than-expected US economic data triggered fears that the Fed had left it too late to lower interest rates. The central bank held interest rates at 23-year highs of 5.25pc to 5.5pc last week, though chairman Jerome Powell indicated that the first cut since lockdown in 2020 was likely in September.
Frenzied bets on rate cuts at one point on Monday implied a 60pc chance that the central bank would be forced to announce a quarter of a percentage point interest rate cut within a week in response to the global loss in confidence.
Bitcoin fell more than 5pc as risk aversion spread throughout the market.
Large swings in market prices are likely to have been exaggerated by the fact it is August, a time when many money managers are on holiday. It means prices are being dictated by thinner trading volumes, which mean prices can swing more easily.
The scramble to sell triggered a series of outages of retail investor trading platforms, including Charles Schwab and Fidelity.
Both companies later said they had resolved any issues, while the odds of an emergency rate cut also ebbed to about 30pc.
Economists warned that an emergency interest rate cut by the Fed risked triggering more market turmoil in financial markets.
Michiel Tukker, senior European rates strategist at ING, said: “The question would then become: what does the Fed know that we don’t? And you don’t want to create the illusion that things are even worse than previously thought.”
Philip Shaw, chief UK economist at Investec, said a sustained sell-off could force policymakers to act.
He said: “Markets are falling but not seizing up. We are mindful that this can change, though, and signs of a threat to financial stability certainly would prompt central bank action. What matters is financial market confidence, which is somewhat intangible and therefore difficult to predict.”
Losses on the US stock market eased as the trading session went on after a closely-watched survey suggested fears of a US recession may be overblown.
The Institute for Supply Management (ISM) said its purchasing mangers’ index (PMI) for the services sector climbed to 51.4 in July, from 48.8 in June. Anything above 50 indicates growth.
However, the data followed weak manufacturing figures on Friday and Stephen Brown at Capital Economics said this was “historically consistent with GDP stagnating at best”.
Michael Gapen, US economist at Bank of America, said the panic triggered by a manufacturing slowdown was overblown, but added that the Fed was still likely to embark on a more sustained campaign of rate cuts.
He said: “We are forecasting a rate cut cycle that begins in September, with 25bp [basis point] rate cuts every quarter until a terminal rate of 3.25pc to 3.5pc in mid-2026.
“Aggressive rate cuts of 50bp or more are done on an emergency basis, as are intermeeting actions. Could we get there? Sure. But we are not there yet.”
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