On Monday, August 5, there was worldwide discussion about the economic recession in the most powerful country in the world. However, the outlook is more encouraging than financial speculations suggest.
On Monday, August 5, the whole world talked about the “recession” in the United States, sounding alarms everywhere. Stock markets in Asia, Europe, and the U.S. plummeted, starting with a report published on Friday reflecting employment figures. The analysis showed percentages that would be good for any emerging country but were low for the U.S.: the rate had risen to 4.3% in July, sparking a storm.
Investors became nervous and their worries increased when Jerome Powell, chairman of the Federal Reserve (equivalent to the central bank in other countries), hinted at maintaining interest rates until September, adding more chill to the economic slowdown. The fear of a possible recession led many investors to quickly sell their shares, affecting various stock indices, which act as a sort of thermometer measuring the health of the market. A cut in interest rates means it is cheaper to borrow money, which theoretically should boost the economy.
The question is whether there is still enough room to maneuver to stimulate the economy and give growth a push. “The Federal Reserve may have delayed interest rate cuts for too long, risking a recession,” warned Mark Haefele, chief investment officer at UBS Global Wealth.
Goldman Sachs, one of the world’s largest investment banking and securities groups, claims there is no need for such alarm.
In the U.S., the S&P 500 index, which reflects the value of the 500 largest companies in the country, dropped 4% in the early hours of Monday morning, and the Dow Jones index lost 1,197 points, similar to a 3% drop.
The Nasdaq, which includes tech companies, also suffered a sharp 5.5% drop, while in Europe, the Ibex 35, the main market index, fell by 3% in its worst day since March 2023.
However, the country that recorded the worst decline was Japan, with a historic 12.4% drop in the Nikkei index, the biggest drop since 1987.
Japanese stocks recovered on Tuesday morning, and the Nikkei 225 stock index rose more than 10% at the opening of the market.
However, the crash was triggered by a rapid rise in the yen in recent days after the Bank of Japan (equivalent to the central bank) raised interest rates at the end of July.
The currency’s rise, which gained 13% against the dollar, punished investors who had borrowed in yen to invest elsewhere in the world, taking advantage of the interest rate differential between Japan and other countries, a strategy known as carry trade.
Frightened, investors who had borrowed in yen sought refuge in safer assets, selling riskier investments and sparking fears among other investors in Japan and around the world.
Banks that move large capital are sensitive to any perception of a possible financial storm, and in seeking to protect themselves, end up causing deeper drops with a domino effect on other markets.
Inflated Tech Stocks
The big tech companies, which had been continuously rising, are also a factor in this Monday’s outbreak. The craze for Artificial Intelligence, which is credited with powers it does not yet have, caused stocks to be somewhat “inflated.”
This was compounded by bad news in recent days. The chip giant Intel announced it would cut 15,000 jobs. Nvidia might have to delay the launch of its new AI chip. Since stock markets move based on perceptions, the tech-heavy Nasdaq index had already been anticipating a 10% drop on Friday.
This uncertainty only increased market fears. For now, all are financial speculations. Experts continue to assert that more elements are needed to talk about a recession in the powerful U.S. economy.
Amid this scenario, the most recent data showed that the U.S. economy grew at an annual rate of 2.8% in the last quarter, a much stronger performance than most developed countries.
