US stocks cratered on Monday as the prospect of a recession in the world’s largest economy spooked investors across the globe and tech giants were hit by a mass sell-off.
The S&P 500 dropped 4.2 per cent at the open, while the Nasdaq 100 tumbled 5.4 per cent.
The Nasdaq Composite, which is dominated by tech giants, has been in correction territory since Friday after falling more than 10 per cent from a record high on 10 July.
It has been hit in recent days by poorly-received financial results and worries over elevated valuations among big names in artificial intelligence, dragging down stocks including Amazon, Intel and Nvidia.
The VIX index, a so-called fear gauge measuring US stock market volatility, jumped to its highest level since the start of the Covid-19 pandemic in 2020.
“The coming months will be a testing time with economic and political uncertainty weighing on the market, as the US heads towards an increasingly unpredictable election,” said Derren Nathan, head of equity research at Hargreaves Lansdown.
Stock markets across Europe and Asia have tumbled over fears that the US economy may be headed for a recession and that its central bank made the wrong decision in holding interest rates at a more than two-decade high last Wednesday.
Latest data for non-farm payrolls, published on Friday, showed a 114,000 increase in July, one of the weakest postings since the Covid-19 pandemic and well below the 175,000 economists had expected, while job growth for the prior two months was revised lower.
The unemployment rate also hit a three-year high of 4.3 per cent, overshooting expectations of 4.1 per cent.
Traders have since piled into bets that the Fed will be forced to aggressively ease monetary policy to avoid a recession, with money markets giving around a 60 per cent chance that policymakers will announce a rare emergency 0.25 percentage point rate cut within a week.
“The US is the world’s most systemically important economy. Downside surprises in the US could have far-reaching consequences for open economies and may influence the upcoming decisions of global central banks,” said Kallum Pickering, chief economist at Peel Hunt.
He added that an “early verbal intervention from the Fed and other central banks” could help to contain stock market risks.
Markets are now betting that US rates will fall to between four per cent and 4.25 per cent by the end of this year, the equivalent of a 1.25 percentage point cut in each of the Fed’s next three meetings in September, November and December.
Analysts at Goldman Sachs have given a 25 per cent probability that the US will slip into a recession, while JPMorgan gave a 50 per cent likelihood.
“In our view, the US economy is slowing down and may drop into recession in the first half of 2025,” said Joachim Klement, an analyst at Panmure Liberum.