By Wayne Cole
SYDNEY (Reuters) – Asia’s main stock indexes fell on Monday as growing fears that the United States could be headed for recession sparked a mass risk aversion and expectations that interest rates will have to be cut sharply and quickly to support growth.
Investors picked up where they left off on Friday with Nasdaq futures down 1.28%, while the blue-chip index futures were down 0.79%. Futures were trading at 34,665, more than a thousand points below the cash close of 35,909.
Treasury futures fell 5 basis points, but that came after a big rally on Friday when yields fell 18 basis points to their lowest level since November.
Two-year yields fell 50 basis points last week and could soon dip below 10-year yields, shifting the curve into a positive direction that has heralded recessions in the past.
The disturbingly weak July payrolls report has led markets to price in about a 70% chance that the Fed will not only cut rates in September, but cut them by a full 50 basis points. Futures are pointing to 155 basis points of rate cuts this year, with a similar amount in 2025.
“We have raised the 12-month probability of a recession by about 10 percentage points to 25%,” Goldman Sachs analysts said in a note, although they believe the risk is limited by the Fed’s enormous scope to ease policy.
Goldman now expects quarter-point cuts in September, November and December.
“Our forecast assumption is that job growth will recover in August and that the FOMC will view a 25 basis point rate cut as an adequate response to any downside risks,” they added. “If we are wrong and the August employment report is as weak as the July report, a 50 basis point rate cut would be likely in September.”
Investors will get a reading on service sector employment from the Institute for Supply Management’s non-manufacturing survey due later Monday, with analysts hoping for a recovery to 51.0 after June’s unexpected drop to 48.8.
The sharp drop in Treasury yields also weighed on the safe-haven appeal of the US dollar, sending the greenback down about 1% on Friday.
Early Monday, the dollar fell another 0.2% against the Japanese yen to 146.19 yen, while the euro was steady at $1.0907.
The Swiss franc was the main beneficiary of risk appetite, with the dollar approaching a six-month low of 0.8586 francs.
“The shift in expected interest rate differentials versus the US outweighs the deterioration in risk sentiment,” said Jonas Goltermann, deputy chief economist at Capital Economics.
“If the recession narrative takes hold in earnest, we expect this to change, and the dollar to rally as safe-haven demand becomes the dominant driver in currency markets.”
Investors have also increased their bets that other major central banks will follow the Fed’s lead and ease interest rates more aggressively, with the European Central Bank now expected to cut rates by about 67 basis points by Christmas.
In commodity markets, gold settled at $2,442 an ounce, supported by lower global yields. (GOL/)
Oil prices rose amid concerns about a widening conflict in the Middle East, although demand worries sent them to eight-month lows last week. (O/R)
The price of a barrel of US West Texas Intermediate crude oil rose 44 cents to $77.24, while it rose 40 cents to $73.92.
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