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Global stock sell-off deepens after disappointing US jobs data

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A global stock sell-off deepened on Friday, with the Nasdaq falling into a correction, as a sharp slowdown in US hiring piled pressure on an equity market already reeling from a steep downturn in semiconductor shares.

The Nasdaq Composite index fell 3.2 per cent, meaning it has now lost more than 10 per cent from its all-time high on July 11.

The downturn followed the latest in a string of underwhelming tech earnings, as well as data showing the world’s biggest economy added 114,000 jobs in July, far fewer than the 175,000 expected.

Unemployment also jumped above forecasts.

The S&P 500 fell 2.2 per cent, as Wall Street extended the previous day’s declines.

US bond yields tumbled following the jobs data as investors flocked to the safety of Treasuries and bet that the Federal Reserve — which held interest rates steady on Wednesday — will be forced to respond to a weakening economy with rapid cuts in borrowing costs.

The US 10-year yield sank 0.14 percentage points to 3.83 per cent, the lowest since December. Investors now expect the Fed to lower borrowing costs by a full percentage point by the end of the year, implying it will have to deliver an extra-large half-point cut at one of its three remaining meetings.

“The Fed rolled the dice one more time on Wednesday and they’ve been proved wrong,” said Steven Blitz, chief US economist at TS Lombard. 

Friday’s jobs numbers “don’t spell recession, but the Fed has to act, and a 0.5 percentage point cut in September is now firmly on the table. They could even move sooner, before the meeting,” he added.

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Friday’s moves came after Tokyo’s Topix benchmark — which reached a record high last month — tumbled 6 per cent in its biggest one-day fall since 2016, also hit by worries about the impact of a rising yen on Japanese corporate profits.

Intel shares plunged 29 per cent after the company revealed plans to axe 15,000 jobs. Amazon shares fell 12 per cent after its profit outlook fell short of Wall Street estimates.

The selling also spread to Europe, where the continent-wide Stoxx Europe 600 was down 2.4 per cent by late afternoon. Dutch semiconductor equipment maker ASML fell 9.6 per cent.

Concerns about an economic slowdown brought an abrupt end to a recent rally in smaller US stocks. The small cap Russell 2000 index on Friday dropped more than 3 per cent for a second consecutive day, and was on track for its worst one-week fall in more than a year.

The prospect of interest rate cuts had initially prompted strong inflows into small caps over the past month, since smaller companies tend to have higher debt burdens and so benefit disproportionately from lower rates.

However, the rally relied on a delicate balance of rates and economic growth. If the Fed cuts rates because the economy is in trouble, rather than simply because inflation is safely under control, that signals a threat to corporate profits.

Raphaël Thuin, head of capital markets strategies at Tikehau Capital, said the small cap rally had been relying on “Goldilocks” conditions. “Goldilocks means seeing a slowdown in inflation but not a big gap in terms of economic activity,” he said.

The sell-off in Japan has been accelerated by heavily leveraged Japanese retail investors rushing to get out of a popular exchange traded fund, the Nomura NF Nikkei 225 ETF, traders said. The ETF closed 11.46 per cent lower on Friday as individual investors rushed to stem losses.

Line chart of ¥ per $ showing The yen is strengthening after hitting a 38-year low in July

Japanese technology groups, led by Tokyo Electron, SoftBank, Lasertec and Advantest, all fell heavily in a rout that traders at two Japanese houses said appeared to have been led by large overnight sell orders from European and US long-only funds.

“It’s been a profit-taking frenzy this week,” said one senior broker at a Japanese securities house. “The big funds are taking risk off the table, and Japan is being hardest hit after a very strong run and now a macro backdrop that looks less bright.”

Part of the damage has been the stronger yen, which has cast a chill over Japanese exporters, traders said.

The Bank of Japan’s unexpected interest rate increase on Wednesday and the implication that it had entered a rate-raising cycle, even as the Fed appears poised to cut rates, has propelled the yen far higher than many had expected.

At Friday’s level of ¥146.83 against the dollar, the yen is about 10 per cent higher than it was in mid-July.

“We don’t think that the Japan story is broken at this point, but the rules of the game have definitely changed,” said Bruce Kirk, chief Japan equity strategist at Goldman Sachs.

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