Last weekend, global markets experienced a sharp panic triggered by a mix of economic and geopolitical factors. In today’s article, we’ll delve into the main reasons behind this turmoil and explore what might happen next. But before we dive in, be sure to follow us on our socials — you won’t regret it.

An Unstable Stock Market

At the beginning of July, our team noticed that although major indices like the S&P 500 and Nasdaq were reaching all-time highs, the concentration of gains in a few leading tech stocks raised concerns, as the market was heavily dependent on a small group of companies. This increased the risk of a significant correction if these companies encountered problems. If even one of those companies were to correct, it would likely bring the rest of the market down.

Source: Greythorn

Soon after, inflated expectations for AI-related earnings started to deflate and some investors began to question the sustainability of these profits, especially when some earnings reports failed to meet market expectations. For instance, even though Alphabet met its earnings expectations, the market reacted negatively (-5%) because investors had anticipated even better performance, showing that valuations were now being questioned.

This uncertainty was amplified by negative news in the tech sector, such as Intel’s announcement of major layoffs following a loss in its second quarter, and the U.S. antitrust investigation into Nvidia, as well as new chip delays due to design flaws. These events not only increased uncertainty around major tech companies but also highlighted structural weaknesses in the market.

Signs of an overvalued and over concentrated market surely contributed to drive the recent market downturn by shaking investor confidence and prompting necessary adjustments in valuations. While these corrections can be painful, they are often healthy in the long run.

Economic slowdown

The recent market correction has also been significantly influenced by signs of an economic slowdown. This slowdown creates uncertainty, which shakes investor confidence and prompts shifts in market behaviour. Key indicators highlight this trend, showing a complex economic landscape with mixed signals.

Housing Market Weakness

Recent data has shown a decline in the housing market, with U.S. existing home sales falling significantly below expectations and new home sales dropping to a seven-month low. These declines suggest weaker consumer confidence and reduced spending power, which are critical components of economic growth.

Mixed Economic Indicators

While the S&P Composite PMI index showed strong growth in the services sector, reaching its highest level since May 2022, other economic indicators point to slowing momentum. The mixed data creates confusion among investors, making it challenging to gauge the true state of the economy.

Source: Bloomberg

Declining Employment Rates

The main indicator signalling a slowing momentum is The U.S. The Employment Cost Index (ECI) and ADP employment, as the numbers for July both came in lower than expected, signalling a slowdown in wage growth and job creation. This suggests weakening labour market conditions, which could reduce consumer spending and further slow economic growth. As employment weakens, the ripple effects can impact consumer confidence and spending, leading to broader economic challenges.

Declining Employment Rates

Non-farm payrolls grew by 114,000, missing the forecast of 176,000 and down from June’s 179,000. This comes after a 7.3% downward revision of the May-June job growth numbers. The unemployment rate increased to 4.3%, higher than the expected steady rate of 4.1% from June.

Source: FRED

Investors now fear the Sahm rule, which signals a recession when the average unemployment rate increases by 0.5 percentage points from its lowest level in the past year.

Source: Investopedia

Geopolitical and Fiscal Uncertainty

Geopolitical factors are also a concern, with Iran threatening Israel over a Hamas leader’s assassination. This could escalate into a wider conflict involving U.S. and Russian support.

Political factors, including fiscal spending and the potential impact of upcoming elections, add to market uncertainty. Fiscal spending is currently supporting consumption, complicating efforts to control inflation. Additionally, former President Trump’s economic plans include policies that could increase inflation by driving up costs and boosting demand. adding to market concerns, such as tariffs and fiscal expansion.

Japanese Stocks Crash on Rate Hike

The Japanese stock market has experienced significant turbulence. The Nikkei 225 index saw its worst decline since the 1987 Black Monday crash, dropping by 12.4% in a single day This drastic sell-off was triggered by several factors, including the Bank of Japan’s decision to raise interest rates, which was aimed at curbing inflation. This move strengthened the yen, making Japanese exports more expensive and less competitive.

Source: CNBC

The volatility in Japanese stocks has also been exacerbated by investors unwinding the “yen carry trade,” where investors borrow in yen at low interest rates to invest in higher-yielding assets. These combined factors have contributed to heightened market instability and a sharp correction in Japanese equities.

What’s next?

Even though recent market events were unrelated to crypto, the cryptocurrency market was hit hard. Bitcoin briefly fell below $50,000 before stabilising around $55,300, while Ethereum dropped near $2,100. The strong selling by Jump Trading, a major market maker, and rumours of their withdrawal from crypto market making, which could further reduce liquidity, is the only thing that could have directly impacted the market.

We are familiar with this type of volatility and we expect prices to recover, particularly as Bitcoin continues to be seen as a hedge against inflation. Adoption is also growing, with more businesses accepting Bitcoin, increasing investment in blockchain technology, and cryptocurrencies becoming more integrated into the mainstream economy. Regulatory clarity is further helping stabilise the market and boost investor confidence, reminding us that Bitcoin will continue to grow and stabilise over time despite short-term volatility.

Meanwhile, calls for the Federal Reserve to cut interest rates have intensified following poor U.S. employment data, but an immediate cut seems unlikely. The market’s overreaction, jumping from an 11% to 86% probability of rate cuts in September, may also signal overreaction.

For now, the Fed is likely to wait for more data before making any decisions. There’s still a chance they could cut rates in time to prevent a major downturn and achieve a “soft landing.” However, it’s important to remember that it’s not just the U.S. market that’s struggling — European and Asian markets are also facing downturns. We can’t be sure if this is just a dip or the start of something more serious. Until we have more information, we’ll need to navigate the choppy market as best we can.

Disclaimer

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