Recently, global financial markets have experienced widespread turbulence, with markets in various countries declining, led by Wall Street stocks in the United States. Additionally, Japan’s stock indices on August 5, 2024, fell to their lowest levels since 1987. This decline also affected Asian, Arab, and European markets, along with losses in oil and cryptocurrencies. These disturbances are linked to major factors, including ongoing fears of a US economic recession, concurrent with continued economic distress in China, escalating tensions in the Middle East, and fears of a large-scale war between Israel and Iran. Meanwhile, the repercussions of the Ukrainian war continue to affect stability in Europe. Collectively, these factors have created a context that heightened investor fears, prompting a surge in selling activity in global financial markets to avoid risks and seek safer assets.
Key Features
The global financial market crisis is associated with several key features and dimensions:
Sharp Decline in US Financial Markets: Global stock markets have seen declines in their main indices in recent days, led by US Wall Street stocks. On August 5, 2024, the Dow Jones Industrial Average fell by about 2.8%, equivalent to 1118 points. The Nasdaq dropped by 6.27%, or 1052 points, and the S&P 500 declined by 4.13%, or 220 points. The Russell 2000 Index fell by about 7%, impacting the performance of global financial market indices.
Impact on Asian Stock Indices: Asian stock indices were more affected by the decline in US markets. Japan’s stock exchange halted trading twice on August 5, 2024, with its main index falling by more than 10%. The Tokyo main index (Nikkei) fell by 12.4%, marking its worst decline since the stock market crash in October 1987. The Topix index fell by 12.23%, Taiwan’s stock exchange dropped by more than 8%, and Seoul’s by more than 9%. Chinese stock markets also declined, with the Hong Kong Hang Seng Index dropping by 2.13%, the Shanghai Composite Index by 1.54%, and the Shenzhen Index by 1.85%.
Aggravation of the Crisis in European Markets: European stocks also saw significant declines on August 5, 2024. The European Stoxx 600 Index fell by 3.1%. Major stock indices opened lower, with Frankfurt dropping by about 2.49%, Milan by about 3.31%, Paris by about 2.42%, Amsterdam by about 3.05%, London by about 1.95%, and Madrid by about 2.79%. Several bank indices, including UniCredit, Deutsche Bank, Société Générale, and Barclays, also saw significant declines.
Increasing Losses in Arab Stock Exchanges: Many Arab stock markets experienced notable losses during trading on August 5, 2024. These losses were influenced by the global market downturn, ongoing tensions in the Middle East due to the ongoing war in Gaza, the continuous escalation between Iran and Israel, and the possibility of a large-scale war between the two.
Decline in Technology Sector Stocks: Technology sector stocks saw significant declines in various markets. In Amsterdam, ASML fell by 4.46%, and BE Semiconductor Industries by 5.17%. In Frankfurt, Infineon dropped by 2.34%. In Paris, STMicroelectronics fell by 5.10%, and Capgemini by 2.93%. Major companies also saw losses on August 5, 2024, with Nvidia falling by more than 6.3%, Meta by more than 2.5%, and Microsoft by about 2.45%.
Decline in Cryptocurrencies: Cryptocurrencies experienced a decline in trading in recent days. The crypto market faced external shocks due to its linkage with institutional portfolios, such as exchange-traded funds in global stock exchanges, including Bitcoin and Ethereum. This led to Bitcoin falling by 11.70% to $52,217, and Ethereum by 15%. The wider crypto market lost $2.2 trillion due to forced sales and a wave of liquidation in the digital derivatives market.
Stimulating Context
These declines are attributed to several main reasons that increased investor fears, prompting a surge in selling activity in global financial markets to avoid risks and seek safer assets. The main reasons include:
Rising Fears of a US Economic Recession: Investor fears of the US economy entering a recession increased due to the release of the US jobs report for July 2024. The report revealed weak job growth and a rise in unemployment to 4.3%, higher than the expected 4.1%, due to the highest levels of temporary layoffs in three years and the lowest private sector employment in 16 months. These data led to declines in the stock and bond markets, with losses in major indices on Wall Street in New York.
Doubts about the US Federal Reserve’s Ability to Handle Crises: Fears of a US economic recession have led many to doubt the Federal Reserve’s ability to deal with this expected recession. The situation is complicated by expectations that the Federal Reserve might cut interest rates by 50 basis points instead of the expected 25, increasing concerns about the potential economic consequences of future monetary policy.
Repercussions of Japan’s Tight Monetary Policy: The Bank of Japan adopted a tight monetary policy after years of negative interest rates, raising interest rates by more than expected at 25 basis points to avoid risk. This monetary tightening, alongside the slowdown in US economic activity, accelerated the yen’s significant rise, supported by the Bank of Japan’s interventions in the foreign exchange market. This negatively affected Japanese exporting companies that benefited from a weak yen, as higher interest rates in Japan boosted the local currency’s value. The dollar fell against the yen by about 2.17% to 143.35 yen, and the euro by about 1.99% to 156.72 yen.
Escalating Tensions in the Middle East: Financial markets faced downward pressure due to escalating tensions in the Middle East between Iran and Israel, and fears of an expanding war between the two, especially after recent assassinations in Iran and Lebanon and the ongoing war in Gaza. Airlines canceled flights to Lebanon and Israel, and there were concerns about the potential impact of these tensions on the flow of oil supplies from the Middle East.
Ongoing Ukrainian War and Its Implications for Europe: European concerns persist amid talks of deploying new armament systems and missiles in Europe as part of the complex situation created by the Ukrainian war. Russian statements about a return to the so-called Cold War and ongoing fears of a potential nuclear confrontation between Western countries and Russia have naturally heightened investor fears, leading them to sell stocks and high-risk assets.
Concerns about Potential Changes in Major Technology Companies: Despite many betting on the role of technology companies in the global economy, recent concerns have arisen about the nature of changes in these companies. Warren Buffett’s Berkshire Hathaway reduced its stake in Apple to 50%, selling off $76 billion in shares. Intel announced plans to cut 15,000 jobs as part of a comprehensive transformation plan. Additionally, there is anticipation regarding the impact of artificial intelligence on technology companies.
Reflections of the Chinese Economic Decline: The Chinese economic slowdown may also have repercussions on global financial markets. Industrial activity in China slowed over the past three months until July 2024, linked to Western efforts to withdraw investments from China. Some indicators showed a contraction in company activities within China, with foreign company revenues in China declining to about $1.5 trillion in 2023, and China’s stock of foreign direct investment equating to only 17% of GDP in 2023.
Investor Tendency to Liquidate Leveraged Trades: Some reports attribute global market turbulence to investors’ sharp liquidation of leveraged trades. According to a report by the Middle East newspaper, “investors borrowed money from low-interest economies like Japan or Switzerland to finance investments in higher-yielding assets elsewhere, known as carry trade; however, they were caught off guard when the yen rose by more than 11% against the US dollar from its lowest level in 38 years recorded just a month ago.”
Safe Havens
Global financial market turbulence raises questions about the future of these markets, with fears of a potential global economic crisis leading to a collapse due to a stagflation scenario in the US economy. However, some propose an alternative scenario where US financial markets have enough resilience to face crises and maintain global financial market stability, supported by the continued strength of the US economy. The US GDP has grown over the past seven quarters, driven by strong consumer spending, and the IMF has raised its 2024 global economic growth forecast to 3.2%.
Amid these fears, investments are likely to shift towards less risky and safer assets, including investing in gold. Investors are turning to gold as a hedge against the potential recession, increasing their portfolio allocation to 7.5 to 10%. Consequently, gold prices have seen a strong rise in recent days, peaking above $2430 per ounce.
Additionally, investors may hedge against stock risks by holding cash or shares in funds and portfolios focused on precious metals and materials related to gold and silver. They might also increase investments in defensive stocks and stocks related to electricity, gas, water, and infrastructure, while avoiding companies linked to the US economy.
