"Black Monday"

Stock markets on the slide: what are the reasons?

(Bild: AP/Ahn Young-joon)

Renewed fears of recession and the fear of an escalation in the Middle East have once again weighed heavily on Europe's stock markets. The domestic ATX lost 2.31 percent in midday trading, while the Euro-Stoxx-50 was down around 2.28 percent. The sell-off mood was particularly prevalent in Asia.

Renewed fears of recession and the fear of an escalation in the Middle East once again weighed heavily on the European stock markets. The leading domestic index, the ATX, lost 2.31 percent in midday trading, while the Euro-Stoxx-50 was down around 2.28 percent. A sell-off mood prevailed in Asia in particular on Monday.

The Japanese Nikkei index plummeted by 12.40 percent, its biggest loss in 37 years. Technology stocks in particular were under pressure in Asia. In addition to equities, cryptocurrencies, which are considered highly speculative, came under heavy selling pressure.

Where were the price losses particularly heavy?
Asian stock markets were hit particularly hard on Monday. The Nikkei 225 slumped by 12.4% after the Japanese benchmark index had reached an all-time high in mid-July. In Seoul, the South Korean leading index Kospi plummeted by almost nine percent and in Taipei, Taiwan, the Taiex lost more than eight percent. On a closing price basis, this was the biggest daily loss ever seen. On the crypto market, Bitcoin slumped to its February level.

What are the reasons for the price slump in Asia?
In Tokyo, it was primarily the recent sharp rise in the yen, the national currency, that weighed heavily on the share prices of export-dependent Japanese companies. This is because a strong yen tends to make the country's exports more expensive.

In Seoul and Taipei, technology stocks in particular suffered from a report that chip manufacturer Nvidia is postponing the launch of new AI chips due to so-called design flaws. As a major beneficiary of the boom in artificial intelligence (AI), Nvidia was recently the driving force behind the general stock market rally.

Why are share prices also falling in Europe?
One reason is that the cooling enthusiasm for the topic of artificial intelligence (AI) has meant that one of the fuels for the recent rally on this side of the Atlantic has disappeared for the time being. "Growth in the field of AI comes with enormous costs, which reduces companies' margins and suddenly makes high share valuations appear exaggerated," wrote Jochen Stanzl, market analyst at trading firm CMC Markets.

What role do the central banks play?
According to Stanzl, the restrictive monetary policy of the European Central Bank (ECB) and the US Federal Reserve is now having an effect. The major central banks, with the exception of Japan's, have raised key interest rates sharply in recent years in order to tackle high inflation as a result of the coronavirus pandemic and the war in Ukraine.

Inflation is now largely under control, but the side-effects of the hike are now becoming apparent: the high interest rates have made investments and loans more expensive, possibly curbing economic growth beyond the level desired by the monetary authorities. This was recently indicated by surprisingly weak labor market and sentiment data from the USA. As the United States is the world's largest economy, its economic weakness is also weighing on many other countries.

How could the central banks react?
There is speculation on the markets about significant or even - as in the case of the US Federal Reserve - extraordinary interest rate cuts to stimulate the economy. However, instead of providing reassurance, such a move could also send share prices on a further downward spiral. This is because investors could see drastic and unexpected interest rate cuts as a sign that the economy is in even worse shape than previously known.

What does the price slide mean for investors?
"First of all, strong nerves seem to be required," wrote equity strategist Markus Reinwand from Landesbank Hessen-Thüringen. However, a correction could prevent a general overheating of the market, especially in the case of highly valued technology stocks. "Perhaps it helps to remember that equities are a medium to long-term investment instrument," the expert continued.

What are the prospects for the equity market?
According to experts, nothing has changed in terms of the fundamental attractiveness of the equity market, especially compared to fixed-interest bonds, which hardly yield any return when inflation is taken into account. "We do not expect the current weak phase to be followed by a tangible crisis that will last for a longer period of time," said analyst Sören Hettler from DZ Bank optimistically.

The profit expectations of the equity companies in the major indices for the next two years point to growth. However, geopolitical burdens from the Middle East conflict could put further pressure on the markets. There are also general fears that the potentially imminent harsh confrontation between Israel and its arch-enemies could have unforeseeable consequences for the region.