Must investors be worried about the stock market sell-off that started with the Bank of Japan increasing interest rates?
Investors are wondering what is driving the stock market sell-off that has caused heightened stock market volatility in recent days with steep falls for major indices.The MSCI All-Country World Index was down -6.4% in three days and there have been signs of recovery since last Tuesday, with Japanese markets rebounding. But what was behind the sell-off and how worried should investors be?
raising fears of a recession in the US and an expectation of rapid rate cuts, combined with a surprise interest rate increase from the Bank of Japan and worries over corporate earnings. Brown says the worry for investors is whether the Fed has left it too late to cut interest rates and if its inaction risks causing a recession. “The problem is that in June the Fed signalled only one rate cut this year. That was too hawkish and left it unable to pivot swiftly in July. The Fed may cut by 50 basis points in September to make up for lost time but the market is now pricing in five cuts in 2024, which is an overreaction.
When combined with the weaker US data , this caused a sharp strengthening of the Japanese yen. In turn, this sparked further market volatility. Taku Arai says: “A reversal in yen weakness, coupled with wage growth, is expected to support consumption going forward. Based on these economic trends, we maintain a positive outlook on the earnings strength of Japanese companies as a whole.”
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