[New York Stock Market] "US Recession Fear Overblown" Amid Broad Rally... Nasdaq Up 1.03%

Morgan Stanley "US Not in Recession"
Diagnoses Overstated US Recession Fears That Triggered Panic Selling
Sharp Rise in Japanese Stock Market Also Helps Ease Sell-off Sentiment
Demand for Safe Assets Declines, US Treasury Yields Surge

The U.S. New York stock market rebounded on the 6th (local time), a day after a sharp drop caused by fears of an economic recession. The panic selling triggered by employment-related recession fears was calmed by analyses suggesting that these fears were exaggerated. The rise in Asian stock markets, including Japan's, the previous day also contributed to the recovery of investor sentiment.

On that day, the Dow Jones Industrial Average, centered on blue-chip stocks, closed at 38,997.66, up 294.39 points (0.76%) from the previous trading day. The S&P 500 index, focused on large-cap stocks, rose 53.7 points (1.04%) to close at 5,240.03. The tech-heavy Nasdaq index climbed 166.77 points (1.03%) to finish at 16,366.85.

Among individual stocks, big tech companies rebounded from the previous day's sharp declines. Nvidia, the leader in artificial intelligence (AI) stocks, jumped 3.78%, and Meta, the parent company of Facebook, rose 3.86%. Ride-sharing company Uber surged 10.93% after reporting quarterly earnings that exceeded expectations. Yum China Holdings, which operates Pizza Hut and Taco Bell in China, and data analytics firm Palantir Technologies also rose 11.98% and 10.38%, respectively, buoyed by strong earnings.

Starting from Asia and extending to the U.S., global stock markets plunged simultaneously on the 5th, the day before. This was due to fears of an economic recession spreading after the announcement last week of a contraction in U.S. manufacturing activity in July and the U.S. unemployment rate rising to 4.3% last month. Additionally, the Bank of Japan's (BOJ) interest rate hike triggered the unwinding of the "yen carry trade," which accelerated capital outflows. According to JP Morgan, the unwinding of the yen carry trade is still at about 50-60%. Concerns over an AI bubble also worsened investor sentiment.

However, the Japanese stock market sharply rose on the day, overcoming Monday's crash known as "Black Monday," which helped improve investor sentiment. The Nikkei 225 index surged 10.2% after plunging 12.4% the previous day, marking the largest one-day drop since 1987. This was the biggest gain since October 2018.

Analyses suggesting that recession fears were exaggerated also led to a recovery in investor sentiment.

On that day, U.S. investment bank Morgan Stanley diagnosed that "the U.S. economy is not in a recession" regarding the recent global stock market plunge caused by concerns over a U.S. economic downturn. The forecast for the Federal Reserve's interest rate cut this year remained at 75 basis points (1bp = 0.01 percentage points), unchanged from previous expectations. Morgan Stanley also assessed that since the U.S. economy is not in a recession phase, there is no need for an emergency rate cut before the September Federal Open Market Committee (FOMC) meeting or a "big cut" of 50 basis points at the September meeting. The day before, Austan Goolsbee, president of the Federal Reserve Bank of Chicago, also stated in an interview with CNBC that "although employment figures came in weaker than expected, it does not yet appear to be a recession" and that "economic growth is at a fairly stable level."

There was also a forecast that the U.S. would maintain solid growth in the third quarter of this year. According to the "GDP Now" report released by the Federal Reserve Bank of Atlanta on that day, the U.S. gross domestic product (GDP) growth rate for the third quarter was projected at an annualized rate of 2.9% quarter-over-quarter. This was an upward revision of 0.4 percentage points from the previous forecast of 2.5% released on the 1st. The U.S. GDP growth rates were 1.4% in the first quarter and 2.8% in the second quarter.

Wall Street considers the unwinding of the yen carry trade as one of the main causes of the recent global stock market crash. Among global investors, the yen carry trade, which involves borrowing low-interest Japanese yen to invest in overseas assets, had been popular. However, after the BOJ raised its short-term policy rate from 0-0.1% to 0.25% last month, yen funds have been returning to Japan one after another. This capital outflow is believed to have triggered the stock market crash.

Some experts predict that volatility in the stock market may continue for some time.

Case Runner, co-chief investment officer (CIO) at Truist, said, "It is too early to say the bottom has come," and predicted, "Damage has occurred, and it is likely to take time to recover."

Ross Mayfield, investment strategist at Baird, said, "Volatility is likely to increase in the short term due to the unwinding of the yen carry trade," and added, "It would not be surprising if pressure intensifies over the next few weeks." However, he analyzed, "The fear of growth is exaggerated," noting that "the labor market remains relatively healthy despite some cooling," and "other economic indicators also appear to be still solid."

Demand for safe-haven U.S. Treasury bonds has decreased, causing bond yields to surge. The yield on the U.S. 2-year Treasury note, which is sensitive to monetary policy, rose 10 basis points from the previous trading day to 3.99%, while the yield on the U.S. 10-year Treasury note, the global benchmark for bond yields, moved up 11 basis points to around 3.89%.

International oil prices also rose slightly as analyses suggesting that recession fears were exaggerated gained traction. West Texas Intermediate (WTI) crude oil closed at $73.20 per barrel, up $0.26 (0.4%) from the previous trading day, and Brent crude, the global benchmark, rose $0.18 (0.2%) to close at $76.48 per barrel.