The S&P 500 fell 1.4 per cent on Thursday and the yield on the 10-year US Treasury fell below 4 per cent for the first time since February, as soft US data revived fears that economic growth could weaken too abruptly. The Institute for Supply Management (ISM) manufacturing survey showed activity contracting by the most in eight months. Initial claims for unemployment benefits, meanwhile, climbed to the highest level in almost a year.

The risk-off turn in markets follows a 1.6 per cent rise in the S&P 500 on Wednesday, on renewed enthusiasm among investors over the outlook for artificial intelligence following more news of rising capital spending from top tech firms. The rally was given further impetus by indications from the US Federal Reserve that policymakers have become more confident that the threat from inflation has passed and that a rate cut could be justified at its next meeting in September.

But such sentiment has taken a hit. 

Market moves on Thursday pointed to investor concerns that the US economy is cooling too quickly and may require further support from the Fed. Fed funds' futures indicate that three 25-basis-point cuts are now fully priced in for 2024 – rising from just two at the end of last week. Amazon’s projected profit also missed analyst estimates whilst the tech heavy Nasdaq futures were down 1.3 per cent during Asia trading hours on Friday morning after a 2.3 per cent decline on Thursday.

Japanese equities also slid further on Friday morning, with the Nikkei 225 falling 4.9 per cent and the broader TOPIX gauge losing 4.7 per cent. This came after Thursday’s declines of 2.5 per cent and 3.2 per cent, respectively, following a sharp rally in Japanese yen in response to the Bank of Japan’s rate hike earlier last week. The regional MSCI Asia Pacific Index also dropped by 3.4 per cent. These declines mirrored the earlier losses in the US, where the S&P 500 and Nasdaq 100 saw substantial dips. 

US recession?
Mark Haefele, chief investment officer at , highlighted how global small cap equities fared better with a return of 6.9 per cent for the month compared with large cap equities of 1.3 per cent, after US tech giants suffered a major setback in July. “More cautious investors benefited from rising bond prices as the inflation pulse continues to subside. Listed property and infrastructure were also beneficiaries from the increasing confidence in future interest rate cuts,” Hurdley said.