The stock market rout may not be over

FOR A while on Aug 5 things were looking awful. During the Asian trading session, Japan’s benchmark Topix share index had fallen by 12 per cent, marking its worst day since 1987. Stock prices in South Korea and Taiwan had tanked by 9 and 8 per cent respectively, and European markets were falling. Before trading began in America, the VIX index, which measures how wildly traders expect share prices to swing, was at a level it had only reached early in the Covid-19 pandemic and after Lehman Brothers collapsed in 2008. Ominously, though gold is usually a hedge against chaos, its price was falling – suggesting that investors might be selling assets they would rather hold on to in order to stay afloat. The previous week’s rout in global markets seemed to be spiralling into a full-blown crisis.

Mercifully, the panic started to ebb once Wall Street opened for business. The VIX fell back to only its highest during the crash of 2022; by the end of the day the S&P 500 index of large American firms was down by a painful, but not catastrophic, 3 per cent. On Aug 6, European markets were fairly flat and Asian ones staged a blistering recovery, especially in Japan, where the Topix rose 9 per cent. Half an hour after the opening bell had rung in New York, the S&P 500 was up by 1 per cent. Traders may be able to pause for breath and a few hours’ sleep. Even as they do so, however, one question looms large. Did markets simply succumb to a brief bout of summer madness, or is the worst still to come?

One clue to the answer is that what began as the unwinding of a few popular trades has now spread. The early stages of the fall, which began in mid-July, were led by Japanese stocks, American big-tech firms and global companies in the chipmaking supply chain. They were triggered by a rapidly strengthening yen in the first case and evaporating euphoria over artificial intelligence (AI) in the next two. On Aug 2, an unexpectedly weak American jobs report accelerated the plunge dramatically by suggesting that the world’s biggest economy may be closer to recession than most had thought.