Investors concerned over US economy slowdown Are their fears valid?

Global markets are experiencing significant turbulence as fears of a US recession drive a wave of risk aversion. Equities have plummeted, the dollar has weakened, and both bonds and the yen have strengthened.

The initial shock came from disappointing US economic data late last week, raising recession concerns. Asian markets felt the brunt, with Japan's Nikkei 225 Index dropping 12.4% to its lowest level since December 2023, Caliber.Az reports, citing foreign media.

European markets also opened sharply lower on August 5. By mid-morning, the Euro STOXX 50 index had fallen 2.8%, reaching its lowest point since January. Italy's FTSE Mib led the declines with a 3.5% drop, while Germany's DAX, France's CAC 40, and Spain's Ibex 35 all fell around 2.5%.

Banking stocks were among the hardest hit, with ING Groep's shares down 6.8%, followed by Société Générale (-5%), Deutsche Bank (-4.4%), and UniCredit (-4%).

In the bond market, German yields declined, with the 2-year yield dropping to its lowest level since March 2023. This shift reflects growing demand for safe-haven assets. Meanwhile, the euro rose to 1.0950 against the dollar, its highest since March 2024, and the Japanese yen strengthened significantly against the dollar.

US economic concerns

Recent US economic data revealed a worse-than-expected contraction in manufacturing and a significant cooling in job growth. Only 114,000 new nonfarm payrolls were added in July, well below expectations. Additionally, the unemployment rate rose unexpectedly from 4.1% to 4.3%.

Mixed quarterly results from tech giants have further weighed on the market, with the S&P 500 index closing its third consecutive week in the red. Notably, Warren Buffett sold nearly half of his Apple stake, significantly increasing Berkshire Hathaway's cash holdings.

The disappointing data has led investors to flock to US Treasury bonds and increased bets on Federal Reserve interest rate cuts. Traders are now expecting rate cuts in September, November, and December.

Analysts' perspectives

Analysts point to bonds and the Japanese yen as the main beneficiaries in this market turmoil. Lower US rates, strategic Japanese FX intervention, and a recent rate hike from the Bank of Japan have all contributed to the yen's strength. ING's Chris Turner and Intesa Sanpaolo's Luca Cigognini expect continued dollar weakness in the short term, though they anticipate ongoing volatility.

Goldman Sachs has raised its 12-month US recession odds to 25%, though some economists, like Jan Hatzius, believe the risk remains limited. They point to the overall soundness of the data and the Fed's ability to support the economy through rate cuts.

Danske Bank has a bearish outlook on EUR/USD, expecting it to decline to 1.05/1.03 in the next 6 to 12 months, due to what they see as excessive pricing of Fed rate cuts.

As markets brace for further developments, all eyes are on the upcoming ISM Services PMI release to gauge whether the contraction in manufacturing is spreading to the services sector, potentially signaling a broader economic slowdown.