Wednesday, 09 Oct, 2024
By: Niyati Sareen
Source: Freepik
The stock market crash of 5th August 2024 was proceeded by a significant fall in share markets all around the world. A potential recession in the US, interest rate hikes in Japan and deteriorating geopolitical conditions led to the largest one-day fall in the stock market since the 1987 Black Monday financial crisis.
Revelling in a ‘Goldilocks’ economy for the most part of 2024, stock market investors now find themselves in a state of uncertainty. The recent stock market crash on 5th August 2024, has caused panic in the market and its global impact has resulted in parallels being drawn with the Black Monday of 1987. There were several reasons which resulted in this dramatic downturn.
Rising Interest Rates in Japan
The unexpected hike in interest rates by the Bank of Japan to curb inflation in the country sparked the crash in the markets. The continued low interest rates from 0% to 0.1% in Japan allowed investors to borrow cash at a very low price, making it one of the top exporting countries. However, when interest rates were increased overnight by 15 bps to 0.25%, the highest it has been since 2008, borrowing money became expensive. This disrupted the Yen Carry Trade, which involved the use of Yen to buy currencies with better yields. Leading to massive stock sell-offs in the Japanese bourses, the Nikkei 225 crashed by a substantial 12% index, its worst fall since the 1987 Black Monday. The Nikkei has now entered a bear market, marking a decline of almost 25% since July. Since global economies are inter-linked, this had a domino effect and led to a market slump all around the world including in the US, Europe and Asia.
Slowdown of the US economy
The current volatility in the global market is in part caused by the faltering of the world's biggest economy. According to the US Bureau of Labor Statistics, USA’s “unemployment rate rose to 4.3% in July”, the highest since October 2021 and “non-farm payroll employment edged up by 114,000”, much lower than the previous months. The Sahm Rule, which is triggered by the rise in unemployment, indicates a recession if the three-month average of the jobless rate is half a percentage point higher than its 12-month low and economists at Goldman Sachs now predict a 25% chance of recession in the next year. In addition, because of the Federal Reserve's tight monetary policy, the high interest rates have discouraged investments and spending, in turn slowing economic activity and reducing business earnings. Coupled with the financial turbulence in Japan, the recession fears in the US saw the Nasdaq Composite fall by 3.4% and the Dow dropping more than 1,000 points. The big tech stocks, including the Magnificent 7 - Nvidia, Apple, Tesla, Alphabet, Amazon, Microsoft and Meta Platforms - also crumbled and “collectively shed $654 billion in market cap” as reported by Barron. \As the US is Japan's second largest trading partner, a recession in the US would only have a negative impact on the already struggling Japanese economy.
Role of Geopolitics
The economic turbulence came at a time when the Middle East, which has the world's largest oil reserves, is in the throes of serious political instability that has disrupted oil supplies and led to fluctuations in energy prices. On 5th August, Brent Crude and West Texas Intermediate Crude benchmarks plunged to their lowest since early this year and fell by 1% and 1.1% respectively. The following day, however, “both benchmarks broke a three-session declining streak”, and oil prices rose by 3%, reported Economic times. The brewing tensions between Iran and Israel and fears of a possible wider war breaking out in the region will not only threaten the global oil supply and drive up energy prices, but also disrupt the global economic system. Some of this will be balanced by potential recession in the US and China’s declining demand for crude oil. But while this could moderate the impact of conflict in the Middle East on oil prices, it will not address the disturbance and disruption that such conflict will cause in the global economy.
The unpredictability of stock prices and its dependence on global events subjects it to vulnerability and volatility. Markets fall faster than they rise, and the current stock crash displays trends similar to the historic global financial crisis of 1987. Although the market is slowly recovering, the international scenario is still unfolding. It remains to be seen whether this is a minor disruption or the beginning of a serious economic upheaval.
