US markets endured another bruising session as a feeble jobs report escalated recessionary fears, resulting in moments of mayhem elsewhere.
The non-farm payrolls report showed that just 114000 jobs had been added in July, against estimates of 185000 and sharply lower than the 179000 figure for June, which itself was revised down from an initial print of 206000. At the same time the unemployment rate, which had been expected to remain stable at 4.1%, increased to 4.3%. The reading followed weak jobless claims and manufacturing data from the previous day which had taken investors by surprise. The main concern now is whether the Federal Reserve’s reluctance to reduce interest rates thus far is now translating into a policy error which will see the economy glide into recession. At the same time, speculation is now rife that a 0.5% rate cut is now firmly on the cards, with the vague possibility that it could come by way of an emergency announcement prior to the September meeting.
The fallout was plain to see, with a flight towards bonds and haven assets and with each of the main indices registering declines. The latest fall of around 2.5% for the Nasdaq puts that market into correction territory, with the index now having fallen by more than 10% from its recent record high. In addition, recessionary fears extended to the banking sector, with the likes of Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) sliding by 5% and 6.4% respectively.
The moves also place perhaps more importance than usual on the services sector ISM, which is due later today, in particular to see whether the weakness of the manufacturing print from last week will be repeated. In addition, the company earnings season continues with updates from the likes of Caterpillar (NYSE:CAT) and Walt Disney (NYSE:DIS), which should shed further light on the manufacturing and consumer areas. Thus far, there have been some unpleasant surprises particularly in the mega cap technology sector, with Amazon (NASDAQ:AMZN) being the latest casualty with a fall of almost 9% after its update disappointed investors following weaker than expected revenues and cautious guidance.
On the other hand, and notwithstanding any further shocks, to have let some air out of the tyres after a recent breathless run is usually seen as a healthy corrective measure. There are few reasons at this precise moment to signal an end to the bull market, even if investor sentiment is understandably cautious. In the year to date, the main indices have still produced a decent return, with the Dow Jones now up by 5.4%, the S&P500 by 12% and the Nasdaq by 11.8% even after drifting into correction territory.
In Asia, the declines were even more pronounced, with Japan’s Nikkei index plunging by as much as 13% to eradicate the entirety of its recent progress, which had included moving to record highs. Indeed, the index is now down by over 4% from a year ago, with the weakness of the yen and the central bank’s move to increase interest rates weighing on sentiment and adding to the inevitable weakness being experienced across the technology sector throughout the region.
Of little surprise was the torrid opening which UK markets encountered following these global waves of unease. Half-hearted moves into defensive stocks provided brief respite for the likes of Unilever (LON:ULVR), Reckitt Benckiser (LON:RKT) and GlaxoSmithKline, but overall the markdown was widespread. Stocks with a particular exposure to the US such as Pershing Square (NYSE:SQ) and Scottish Mortgage (LON:SMT) topped the loser board with losses of over 8% and 7% respectively, while the banks also suffered, with the likes of Barclays (LON:BARC) and NatWest (LON:NWG) declining by 5% in something of a read across from the Wall Street experience.
The FTSE250 also felt the selling pressure, reducing its gains in the year to date to just 2.6%, while the FTSE100 is now ahead by 3.7% with the recent testing of record highs now slipping away into more distant memory. It remains to be seen whether these reactions are overdone, as can often be the case until the negative momentum subsides, and whether there is also something of a buying opportunity emerging given that markets are prone to exaggeration in both directions on the back of a marked change of sentiment.