The benchmark S&P 500 ended 1.8% lower on the day and down 2.1% for the past five days, its worst weekly loss since mid-April.
US bond yields tumbled following the jobs data as investors flocked to the safety of Treasuries and bet that the Federal Reserve — which held interest rates steady on Wednesday — would be forced to respond to a weakening economy with rapid cuts in borrowing costs.
“The Fed rolled the dice one more time on Wednesday and they’ve been proved wrong,” said Steven Blitz, chief US economist at TS Lombard. The US 10-year yield sank 0.16 percentage points to 3.82%, its lowest since December.
Investors now expect the Fed to lower borrowing costs by more than a full percentage point by the end of the year, implying extra-large half-point cuts from at least one of its three remaining meetings.
“The parts of the economy that are interest rate-sensitive are suffering — small businesses, the lowest tiers of consumers,” said Rick Rieder, chief investment officer for global fixed income at BlackRock. “I don’t think the Fed needs to panic, but I think they at least need to verify that they can move [by half a percentage point] in September.”
The Vix index of expected US stock market turbulence — commonly known as Wall Street’s “fear gauge” — climbed as high as 29 points on Friday, double its year-to-date average and the highest level since the US regional banking crisis in March last year.
Concerns about an economic slowdown also brought an abrupt end to a recent rally in smaller US stocks. The small cap Russell 2000 index on Friday closed down 3.5% for the day and 6.7% for the week, its worst one-week fall in more than a year.
Rate-cut hopes had encouraged strong flows into small cap stocks over the past month, since smaller companies tend to benefit disproportionately from lower rates — but only so long as the economy is not weakening sharply and undermining profits.
Raphael Thuin, head of capital markets strategies at Tikehau Capital, said the small cap rally had been relying on “Goldilocks” conditions. “Goldilocks means seeing a slowdown in inflation but not a big gap in terms of economic activity,” he said.
The US sell-off followed sharp declines in Japan and Europe earlier in the day.
Stocks in Tokyo suffered their worst one-day fall since 2016 amid concerns about the impact of a rising yen on Japanese companies following the Bank of Japan’s surprise rate rise early in the week. In Europe the blue-chip Euro Stoxx 600 lost 2.7%.
Japanese technology groups, led by Tokyo Electron, SoftBank, Lasertec and Advantest, all fell heavily in a rout that traders at two Japanese houses said appeared to have been led by large overnight sell orders from European and US long-only funds.
Tokyo’s sell-off was accelerated by heavily leveraged Japanese retail investors rushing to get out of a popular exchange traded fund, the Nomura NF Nikkei 225 ETF, traders said. The ETF closed 11.46% lower on Friday as individual investors rushed to stem losses.
“It’s been a profit-taking frenzy this week,” said one senior broker at a Japanese securities house. “The big funds are taking risk off the table, and Japan is being hardest hit after a very strong run and now a macro backdrop that looks less bright.”
Part of the damage has been the stronger yen, which has cast a chill over Japanese exporters, traders said.
The Bank of Japan’s unexpected interest rate increase on Wednesday and the implication that it had entered a rate-raising cycle, even as the Fed appears poised to cut rates, has propelled the yen far higher than many had expected.
At Friday’s level of ¥146.93 against the US dollar, the yen is about 10% higher than it was in mid-July.
“We don’t think that the Japan story is broken at this point, but the rules of the game have definitely changed,” said Bruce Kirk, chief Japan equity strategist at Goldman Sachs.
The Financial Times
