Monday stock market in Japan plummeted 12%, a worst drop since Wall Street’s Black Monday in 1987. It reverberated global markets from the Europe to the Wall Street. The Dow dipped 2.6%, the Nasdaq lost 3.4% and S&P 500 slipped 3.0%.
The fears of global turmoil in the markets are likely contributed by:
1. Carry trade thanks to the strengthening Japanese yen.
2. Reposition of portfolios by large funds.
3. Worries over the health of the U.S. economy after Friday’s disappointing July jobs report.
4. Concerns over the Federal Reserve too late to cut interest rates under mentality of higher for longer.
5. Fear of lack of coordinations between central banks to avoid large fluctuations in foreign exchange rates.
At the time I wrote this note, the Japanese stocks have largely recovered Monday’s losses, and the future of the Wall Street pointed higher. While it is hard to predict the market dynamics, I think the turmoil will serve a lesson learnt for policymakers in the world – the world is connected strongly even when globalization has set back quite a bit.