Japanese Stocks Under Pressure and US Technology Stocks in Focus

Global financial markets have experienced a significant wave of sell-offs in recent days, especially impacting Japanese stocks. Several factors have contributed to a complex and challenging market environment, posing great challenges for investors.

Japanese Markets Under Pressure
The Japanese Topix index has fallen by 24% since its record high last month. The Nikkei 225 suffered its worst single-day decline as investor confidence plummeted. These dramatic losses were largely triggered by the Bank of Japan’s rate hike on July 31. This measure led to a sudden rise in the yen, significantly impacting exporter’s profit forecasts. Yen-funded carry trades, popular with investors in times of low volatility, were unwound as higher interest rates reduced the attractiveness of this strategy, further contributing to market panic and sell-offs.

US Technology Stocks and AI Euphoria
The US markets were not spared from this global trend. High-valued US tech stocks came under pressure. The Nasdaq 100 futures recorded their worst opening day in four years. The euphoria over Artificial Intelligence (AI), which had driven tech stocks in recent months, is starting to cool. This has led to a revaluation of many tech stocks, especially in the context of a possible economic slowdown.

Setback in a Bull Market?
Looking at the number of days without a 10% correction based on the MSCI ACWI Index, it becomes clear that the current movement was overdue. We do not see a risk of a bear market from today’s perspective. In historical analyses, the current movement was more commonly associated with unforeseeable events like the Lehman crisis or military escalations – which is not the case now. Even the tensions between Israel and Iran currently play a minor role. A look at the Brent and WTI crude oil prices also reflects this. Recession fears seem to be predominant as crude oil prices decline – a looming escalation in the Middle East would be reflected in rising prices.

US Labor Market Data
Weaker-than-expected labor market data in the U.S. has sparked a heated debate on whether the economy is slipping into a recession. The unemployment rate increased in July, partly attributed to a continuing normalization of the labor market post-pandemic. Some market analysts are calling for a quick and significant rate cut by the Federal Reserve. A cut by one percentage point to 4.25%-4.5% by the end of the year is deemed necessary to avoid economic damage. Rate futures markets suggest that a rate cut of over 200 basis points by the end of 2025 is expected, which would bring the Fed Funds rate close to 3%. While the probability of a recession has increased, it remains at a low level compared to recent months. Another sharp rise would require a significant deterioration in the macroeconomic picture. A timely rate cut by the U.S. Federal Reserve would benefit the U.S. economy, in our view, to counteract further deterioration.

Global Political Tensions
In addition to economic uncertainties, geopolitical tensions also contribute to market volatility. Israel is preparing for possible attacks by Iran and regional militias after leading Hezbollah and Hamas figures were assassinated. The U.S. is sending defensive reinforcements and pushing for a ceasefire in Gaza to prevent an escalation of the conflict.

Market Commentary Conclusion: A Complex Market Environment
The current market situation results from a complex interplay of several factors: 

• Rate Hikes in Japan: The sustainable end of loose monetary policy by the Bank of Japan has strengthened the yen and worsened the outlook for exporters.

• Massive Sell-off in Tech Stocks: The sell-off was triggered by a cooling of AI euphoria, very high valuations, and economic uncertainty.

• Weak US Labor Market Data: The disappointing data stoked recession fears leading to calls for exaggerated rate cuts by the Federal Reserve.

• Global Political Tensions: Especially the tensions in the Middle East between Israel and Iran added extra uncertainty and downward moves in the markets.