The global stock-market selloff intensified, resulting in a dramatic decline of over 12% for Japan’s Nikkei 225.

Wall Street’s main indexes slumped on Monday after bourses from Asia to Europe took a beating as fears of a U.S. recession and unwinding of carry trades rippled through global markets.

The selloff was brutal, with the so-called Magnificent Seven group of stocks – the main driver for the U.S. indexes – set to lose a combined $900 billion in market value. Tokyo’s Nikkei index finished Monday with a 12% loss, the largest one-day drop since the aftermath of “Black Monday” in October 1987.

There is no lone trigger for these moves, but data on Friday that showed the U.S. economy did not generate as many jobs as expected in July has been a major catalyst, while in Japan an interest rate hike on July 31 has made bets on a cheap yen – used to fund purchases of assets with better returns – less profitable.

This decline follows a tumultuous period on Wall Street, where popular trades of the year have been aggressively unwound.

Tech sell-off

The premarket selloff in technology shares continued, with major players like Nvidia, Meta, and Apple each losing 5% or more.

Apple was further impacted by weekend filings showing Berkshire Hathaway had significantly reduced its stake in the company.

Investor concerns about a slowing U.S. economy have taken centre stage, particularly after data revealed a sharp slowdown in job growth in July.

Many investors now fear the Federal Reserve has been too slow to act and may need to expedite rate cuts following its September meeting.

Globally, investors sought the safety of the bond market.

The yield on the 10-year U.S. Treasury recently traded around 3.77%, down from over 4.1% a week ago, and was on track to settle at its lowest level in over a year.

The VIX, Wall Street’s fear gauge, surged above 34, its highest intraday level since 2022.

Yields on Treasury notes fell, with those tied to the two-year note dropping the most, causing the yield curve to steepen.

Asian markets

Japanese stocks were among the hardest hit worldwide.

The Nikkei 225 experienced its largest single-day drop since 1987. In other markets, South Korea’s benchmark Kospi fell 8%, and the Stoxx Europe 600 declined by around 2%.

The yen strengthened by more than 2% against the dollar, continuing a trend that began last month.

Bitcoin’s price also plummeted, trading around $53,000, down roughly 11% from Sunday’s 4 p.m. ET price.

Major shift

A meltdown in world equity markets in recent days is more reflective of a wind-down of carry trades used by investors to juice their bets than a hard and fast shift in the U.S. economic outlook, analysts say.

While Friday’s weaker-than-expected U.S. jobs data was the catalyst for the market sell-off, with Japan’s blue-chip Nikkei index on Monday suffering its biggest one-day rout since the 1987 Black Monday selloff, the employment report alone wasn’t weak enough to be the main driver of such violent moves, they added.

Instead, the answer likely lies in a further sharp position unwind of carry trades, where investors have borrowed money from economies with low interest rates such as Japan or Switzerland, to fund investments in higher-yielding assets elsewhere.

“We don’t see evidence in data that’s saying we’re looking at a hard landing,” said Mark Dowding, chief investment officer at BlueBay Asset Management, referring to pre-determined levels that trigger buying or selling.

“In our assessment a lot of this (market sell-off) has been down to position capitulation as a number of macro funds have been caught the wrong way around on a trade, and stops have been triggered, initially starting with FX and the Japanese yen.”