Japan's main stock market index closed 12.4% lower on Monday and markets across Asia and Europe fell sharply, with Wall Street also set to open lower.
Getty Images; Jenny Chang-Rodriguez/BI
Japan's main stock market index suffered its biggest fall since 1987, closing 12.4% lower on Monday, while markets in Asia and Europe also fell sharply.
The sharpest sell-off since "Black Monday" sent the Nikkei 225 sinking and compounded a 5.8% fall on Friday.
The declines were sparked in part by Japan's interest-rate rise last week that strengthened the yen against the dollar, and factors including disappointing US jobs numbers on Friday.
US stock markets sunk at the end of last week as investors digested a streak of negative economic data and disappointing earnings from Big Tech companies.
The S&P 500 fell 3% in just two days, while the tech-heavy Nasdaq Composite shed nearly 5%, putting it in correction territory.
Wall Street is set to open lower on Monday, with S&P 500 futures down 2.2% at about 5 a.m. ET, while Nasdaq 100 futures were about 3.6% lower.
"We haven't seen a day of carnage like this, really, since the COVID selloff back in February, March 2020, " Tony Sycamore, an analyst at IG Australia, told Bloomberg TV.
South Korea's Kospi closed 9% lower after a trading halt earlier in the day, Taiwan's Taiex fell 8.4% and Australia's ASX 200 ended 3.7% lower.
India's Sensex was 3.1% lower at 12:48 p.m. local time, while the Nifty 50 was down 3%.
Hong Kong's Hang Seng Index fell as much as 2.8%, and China's CSI 300 dropped as much as 1.3% lower. The Chinese stock markets were already under pressure this year due to the country's economic troubles.
In Europe, the region-wide Stoxx 600 fell 2.5% as trading got underway on Monday.
Paris was down 2.4%, Frankfurt shed 2.6% and in London, the FTSE 100 fell by more than 2%.
Bitcoin tanked 14% over the past 24 hours.
The negativity in US stocks ahead of the week's opening came after a recent selloff in tech stocks as euphoria over artificial intelligence fizzled, with investors questioning when they would be seeing returns.
A weak July jobs report from the US added to investor gloom, sparking a selloff in US stocks on Friday, just days after the Federal Reserve kept interest rates steady again.
But it's not just the US economy and the Fed that is weighing on the markets. It's also about Japan's interest-rate hike last Wednesday, which IG's Sycamore told Bloomberg TV was "the straw that broke the camel's back."
The Bank of Japan raised its interest rate from between 0% and 0.1% to 0.25% on Wednesday — the highest level in 15 years.
The increase appears small but it matters because the yen's been the focus of carry trade, where traders profit from a divergence in interest rates across the world. Since the turnover in global foreign exchange markets is massive — it reached a record $7.5 trillion per day in April 2022, according to a triennial survey — the fallout can be huge.
Japan kept interest rates ultra-low for decades following the implosion of an asset bubble in the 1990s that contributed to persistent deflation. It continued holding rates low after the pandemic, in contrast to other major central banks that started hiking them.
This created a divergence in monetary policy that impacted the Japanese yen, which sank to a near four-decade-low against the strong US dollar last month.
This divergence helped the carry trade, which has been a dominant investment strategy this year.
The ING analysts said it involved "borrowing cheaply in yen — on the expectation that the yen will continue to fall — and investing in some high-yielding currency or asset preferably backed by a strong macro argument."
However, this strategy is now hit with a hitch, as the BOJ's rate hike last week sent the yen up — it's 7.5% higher over the past five trading days and is 1.6% lower against the dollar so far this year.
On Monday, the yen rose as much as much as 3.3% to 141.7 per dollar, a level last seen in January.
The BoJ's rate hike has also fanned further risk-off sentiment in global stock markets.
"The unwinding of yen shorts is undoubtedly contributing to the global risk-off environment," wrote ING analysts in a separate July 25 note.
There are still be choppy waters ahead, particularly for risk assets, said Vishnu Varathan, Mizuho Bank's chief economist of Asia excluding Japan on Friday.
"The dark clouds of adverse feedback loop between 'carry' liquidation and 'risk off' contagion cannot be ignored," he added.
