Markets tumbled as fears of a U.S. recession intensified, leading investors to flee from risk assets and causing a rally in bonds. The Nikkei 225 experienced a dramatic 9% drop, hitting eight-month lows and entering bear market territory, marking its steepest three-day decline since the 2011 financial crisis. This follows a 10% correction in the Nasdaq Composite from its early 2022 peak, with Nasdaq futures falling an additional 3.5%. The yen surged to a seven-month high amid these tumultuous conditions. Daniel Tan, a portfolio manager at Grasshopper Asset Management in Singapore, expressed skepticism about the likelihood of five Fed rate cuts by the end of 2024, suggesting instead that two cuts totaling up to 75 basis points by the year's end are more plausible. Tan sees potential in increasing bond duration in the coming months and believes emerging market bonds will perform well in a gradually declining interest rate environment. He also noted that the recent selloff, driven by a surge in global tech stocks, could persist as investors seek to offload assets to cover losses.

George Boubouras, head of research at K2 Asset Management in Melbourne, highlighted the market's overreaction to weaker economic data, particularly the latest payroll figures, suggesting a more balanced view will emerge from the three-month rolling average. He pointed out that while recent U.S. economic data shows a slowdown, core inflation improvements and Fed commentary hint at a potential 25 basis point rate cut in September. Despite volatility, Boubouras believes that aggregate earnings and credit conditions remain stable, and expected pre-election rate cuts could contribute to market turbulence. Meanwhile, Ryota Abe, an economist at SMBC in Singapore, predicted that USD/JPY could shift to the 140-145 range due to disappointing U.S. non-farm payroll data and ongoing Middle East tensions. He emphasized that a stronger yen would pressure the Nikkei index as corporate margins shrink, driven by unexpected yen appreciation.

Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo, warned of further declines in dollar-yen, with the next support level around 144.50, and potentially reaching 140. However, he argued that market expectations of a 50 basis point rate cut by the Fed in September are excessive, as the U.S. economic slowdown is not as severe as markets suggest. Charu Chanana, a market strategist at Saxo Markets in Singapore, observed a dramatic shift in market sentiment from inflation concerns to recession fears. She noted that U.S. economic data is now crucial, with increasing skepticism about a soft landing for the U.S. economy leading to further equity and carry strategy pullbacks. Chanana also commented that markets have likely overreacted in pricing four Fed rate cuts this year, given the June dot plot only indicated one cut and persistent structural inflation forces.

The Nikkei 225 and Topix indices fell more than 8% and 9%, respectively, by early afternoon on August 5, following significant losses in the previous week that triggered a broader global equity sell-off. Trading in the Nikkei 225 was halted twice due to circuit breakers. The sharp declines came after the Bank of Japan's decision to raise interest rates on July 31, a move followed by the U.S. Federal Reserve signaling potential rate cuts as early as September. This juxtaposition of Japanese rate hikes and anticipated U.S. rate cuts exacerbated market volatility, highlighting the complex dynamics influencing global financial markets.

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