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Yesterday was a decidedly black Monday for the stock market. Not since the pandemic has the stock market rebounded as it has in recent days. A bogeyman for Wall Street. This time big tech stocks played a key role, and their origin could be linked to the devaluation of the yen.
Black Monday
It all started in Asia, with Japan’s Nikkei index, which after losing 5.6% on Friday, plummeted 12.4% yesterday morning when the markets reopened. In the last three weeks it has thus lost 26%. And it is not the only one: Wall Street at -2.6%, with some analysts beginning to speculate on an emergency rate cut by the Fed, accused of having waited too long to loosen its monetary tightening. Milan’s Ftse Mib fell -2.3%, as did Paris’ Cac (-1.4%), Frankfurt’s Dax (-1.9%), London’s Ftse 100 (-2.1%), Madrid’s Ibex (-2.3%) and Amsterdam’s Aex (-2.1%).
But on the stock market it was mainly the large technology companies that suffered the most: Nvidia Corp +4.49%, Alphabet Class A -0.93% and Meta Platforms +0.10% . Sales also on Apple +0.38% following news that Warren Buffett’s Berkshire Hathaway sold almost half of its shares in the Cupertino-based company in the second quarter.
In Milan, no stock managed to close above parity: Nexi dropped 6%, then Erg (-4.7%), Saipem (-4.1%) and Hera (-4%).
Analysts are divided: on the one hand the geopolitical tensions in the Middle East, which are growing stronger and stronger, and on the other hand, of course, the spectre of a recession in the US economy. There could be different causes here.
The reasons
The increased risk of recession is said to lie in an obviously ill-advised US soft landing policy: with the worry of an imminent recession, for the past two years many economists have chosen the path of the ‘soft landing’, a choice used when an economy is growing strongly and central banks, such as the Federal Reserve in the US, try to curb its overheating, which, in the worst cases, could lead to excessive inflation, so as not to cause a drastic drop in economic growth. This leads to moves such as controlling inflation, keeping unemployment levels low, and finally playing with interest rates through monetary policies: in the latter case, for example, the central bank can gradually raise interest rates to make credit more expensive and reduce spending and investment, or sell government bonds to reduce the amount of money in circulation or buy them to increase liquidity.
Also not to be underestimated is the lack of liquidity: the major central banks are reducing, rather than increasing, liquidity in circulation. The Federal Reserve continues to reduce its balance sheet. If it continues to do so, it could cause inflation to rise.
Instead, in July, there was the sudden rise in unemployment to 4.3% (the worst figure in the last three years) and stock market prices judged by many to be too high, especially for technology stocks. In recent years, in fact, the stocks of big tech companies such as Apple, Nvidia, Meta-Facebook, Alphabet-Google, Microsoft, Amazon and Tesla, have continued to rise, mainly because of the artificial intelligence hype.
But what provoked this Monday was, according to many observers, the yen’s shock: the Bank of Japan on 1 August raised rates to 0.25%, as it had not done since 2007 and at a time when all the other major central banks, starting with the US central bank and the ECB, have rather high rates. This triggered a rebound of the yen against the dollar and other major currencies. Precisely on the strong devaluation of the yen over the past two years, which led to a 50% loss in value of the Japanese currency against the dollar, many investors thus borrowed money in yen currency – thus at a low interest rate – to then buy assets in other countries with higher yields (carry trade). And much of the rise in Nasdaq tech stocks related to artificial intelligence is said to have been fuelled by just such trades.
The recent quarterly reports of Alphabet, Microsoft and Amazon have also shown difficulties, mainly due to artificial intelligence. Despite this, analysts such as Toshiya Hari of Goldman Sachs continue to recommend buying Nvidia’s shares, predicting that the Blackwell chip will play a crucial role in the group’s future growth.
A mix therefore probably triggered more by stock exchanges and banking transactions than by conflicts, from Ukraine to Gaza to the risk of escalation across the Middle East. This episode is a prime example of the bubble in technology stocks which is about to deflate. Microsoft, Meta, Apple and Amazon together have seen $1 trillion in value burned in three weeks. And confirming this is also an editorial in the Financial Times that was published on Sunday 4 August, thus the day before the Japanese stock market crash. (Photo by Aditya Vyas on Unsplash)
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