Summary
Global stock markets have reversed, with Japan's benchmark Topix index on Aug. 5 suffering its biggest one-day drop in more than three decades.
Key points
- Market reversal: Global stocks suffered big losses, with Japan’s Topix index racking up its largest one-day drop in more than three decades. European and US stocks also fell, while bond yields reversed the rise seen earlier this year. Disappointment over tech earnings, concerns about the US economy, and rising geopolitical risks contributed to the shift.
- Macroeconomic background: July labour market data point to a slowdown in the US economy. Combined with a more benign inflation picture in a restrictive rate environment, central banks will likely need to cut faster than they envisaged. Market volatility may affect the timing of cuts, but strong corporate and household balance sheets and proactive central bank actions should help ensure an orderly slowdown.
- Investment implications: A spike in volatility may warrant reducing risk exposure as a precaution, but the moves could create opportunities in developed markets, especially in equities. Government bonds appear less attractive after recent moves, while the outlook for corporate bonds is mixed, with investment grade credit preferred to the high-yield segment.
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