Crisis on Wall Street: Inside the Turbulent August 2024 Market Crash

On 5 August, 2024, global markets took a sharp dive, sparking a rapid and severe financial downturn that sent shockwaves across the board. 

This article dives into the various factors that led to this market downturn, from unexpected policy changes in Japan to concerning economic signs in the US. By analysing how these factors interacted, we can better understand the complex dynamics of the markets and the rapid effects of global economic connections. 

Key Points

• The stock market crash on 5 August 2024 led to widespread declines across major indices, influenced by a rate hike in Japan and troubling economic indicators from the US, affecting not only equities but also forex and commodities markets. 
• A concerning US job report spurred fears of a recession, and together with last Wednesday’s unexpected policy changes by the Bank of Japan, prompted significant market volatility and upheaval in investment strategies. 
• The global stock market downturn significantly influenced forex and commodities markets, highlighting the deep interconnectedness of different asset classes and the rapid response of these markets to changes in economic policies and data. 

What Happened to the Stock Markets? ^[1,2,3,4,5] 

On 5 August 2024, global markets faced a significant downturn, reminiscent of historic crashes. Triggered by a rate hike in Japan and concerns over a slowing US economy, major indices plummeted across the board. Notably, the unexpected rise in Japanese interest rates and yen strength continued to see the unwind of the Japanese yen carry trade, causing widespread unease. 

The upheaval bore a partial resemblance to the infamous “Black Monday” of October 1987, when the S&P 500 and Nasdaq lost 20% and 11.5% in a single day, respectively. Instead, this was seen in Japan, as the Tokyo Nikkei 225 index suffered one of its worst single-day losses, closing over 12% lower. Similarly, in Korea, the Kospi index tumbled by nearly 9%, prompting a rare 20-minute trading halt—the first such interruption in four years, triggered by a rapid more than 8% drop within a minute. 

In the United States, the impact was less severe. The Dow Jones Industrial Average (DJIA) fell by 2.6%, while the broader S&P 500 and the tech-focused Nasdaq declined by 3%. These drops extended a week of losses, with the Nasdaq down over 13% from its record July high.  

Additionally, the Cboe Volatility Index (VIX), which gauges market volatility, rose dramatically. It surged from around 17 a week prior, to 23 on the preceding Friday, and then peaked above 65 on Monday morning. By the close of trading, it had moderated to 38.6, its highest closing since 2020.  

This spike in the VIX, reaching levels last seen during the market disruptions in March 2020, highlights the sharp increase in market anxiety. 

What Caused the Stock Market Crash? ^[6,7] 

So what caused this crash in the markets?  

Following the turbulent events of 5 August 2024, analysts have pinpointed a few critical factors contributing to the global market crash. Primarily, mounting fears of a US recession after a particularly weak July jobs report spurred investor anxiety.  

The US Labor Department revealed that non-farm payrolls increased by only 114,000 for the month, significantly below expectations and a decrease from June’s revised figures. This sluggish job growth, combined with the unemployment rate rising to 4.3%—its highest since October 2021—signalled potential trouble ahead for the economy. 

Additionally, the unexpected increase in Japanese interest rates added to the market’s volatility. The Bank of Japan’s decision to raise rates by 15 basis points—to 0.25% from nearly zero—further disrupted the yen “carry trade.” This strategy, which involves borrowing at low-interest rates in Japan to invest in higher-yielding assets internationally, had been popular among investors seeking to capitalise on the interest rate differential. 

However, the rate hike, coupled with the anticipation of cuts by the Federal Reserve, led to a stronger yen and market sell-off as traders faced margin calls. This confluence of factors underscored the depth of the market’s sensitivity to both domestic and international economic signals, leading to widespread declines across major stock indices. 

How Much Did the Stock Market Lose? ^[8,9]

As US markets opened on 5 August, the landscape was bleak for technology’s leading firms. Collectively, the megacaps lost approximately $1 trillion in market capitalisation, exacerbating a downturn that had already pushed the Nasdaq into correction territory the previous week. This decline erased $907 billion from Nasdaq’s total market value. 

Nvidia was among the hardest hit, with its market cap initially plummeting by more than $300 billion. However, it managed a partial recovery, regaining about half of that loss by the end of the trading day, closing with a net loss of $168 billion, or down 6.4%.  

Apple and Amazon also faced sharp declines; Apple’s valuation dropped by $224 billion and Amazon’s by $109 billion at the market open. By the close, Apple’s shares were down 4.8%, reducing its market cap by $162 billion, while Amazon’s shares fell 4.1%, translating to a $72 billion loss. 

Adding to the turmoil, other major tech players such as Meta, Microsoft, Alphabet, and Tesla also saw significant declines. Collectively known as the ‘Magnificent Seven,’ these stocks experienced a combined loss of $995 billion in market value within the early moments of trading, underscoring a tumultuous day for traders and the tech sector at large. 

Impact on Other Asset Classes

Here’s a look at how the recent downturn in global stock markets impacted other asset classes beyond equities, showcasing the extensive influence and interconnected nature of today’s financial markets. 

Forex Market ^[10]

In the forex markets, the USD experienced a dip to 102.16, but saw some recovery during the US session. This movement was influenced by Friday’s disappointing non-farm payrolls (NFP) data, which intensified fears of a recession and led to a sharp reevaluation of expectations for Federal Reserve rate cuts.  

Markets have now almost fully priced in two significant rate cuts of 50 basis points for the upcoming Federal Open Market Committee (FOMC) meetings in September and November, with a strong possibility of an emergency rate cut of 25 basis points. Despite these challenges, the ISM PMI services figures exceeded expectations, although the thinner liquidity typical of summer is contributing to increased volatility in prices. 

The EUR gained strength as the yield differentials between the US and Europe narrowed significantly, a shift also spurred by the soft NFP data. This is a complex situation for the EUR, typically sensitive to global growth trends, which are currently on the softer side. However, perceptions that the Fed is lagging in its response have fuelled expectations of aggressive rate cuts, pushing EUR/USD up to resistance just below 1.10. 

In the UK, the GBP had a comparatively stable day, with the currency pair GBP/USD dropping to 1.2709 before recovering some of its losses. The most notable movements were observed in EUR/GBP, which spiked above 0.86 and the 200-day SMA, after surpassing the crucial 0.8492 level. Meanwhile, safe-haven currencies like the JPY and CHF also saw significant activity; USD/JPY dropped to a low of 141.68 and CHF dipped to 0.8433 before both rebounded. 

The AUD displayed volatility, notably spiking lower to 0.6347 with attention now turning to today’s Reserve Bank of Australia meeting. The USD/CAD pair increased to 1.3946 before settling closer to 1.38, with the cycle high from October 2022 at 1.3977 serving as a key reference point. 

These currency movements reflect the broad and swift impact of US economic data and policy shifts on global forex markets, demonstrating how closely intertwined the world’s financial systems are. 

Commodities ^[11] 

The commodities market experienced a significant downturn, with everything from copper and gold to crude oil seeing sharp declines. This widespread selloff was triggered by a global financial unease, causing traders to liquidate profitable positions and place new bearish bets.  

Copper prices fell as much as 3.8% on the London Metal Exchange, while silver led the decline in precious metals with a drop of over 7%. Even benchmark crude contracts weren’t spared, dipping more than 2% before regaining some ground. 

This retreat in commodity prices is largely a reaction to US economic data that suggests a weakening in the world’s largest economy, raising fears that the Federal Reserve might be too late in adjusting its monetary policy to ward off a significant downturn. Gold, typically a safe haven during economic turbulence, also took a hit as investors sold their positions to cover losses in other areas. Despite this, the precious metal, which is up 16% this year, is expected to regain its status as a protective asset if the market instability persists.  

What to Expect in These Coming Weeks 

The key thing to remember with these types of market moves is that we are deep into “summer markets”. Many traders at big investment banks and hedge funds are away on holiday. That means liquidity and volumes are much thinner than normal, which ultimately can result in very sharp, and sometimes inexplicable, price action. Sure, there are some themes which could endure, like the softer US data, but they do not warrant some of the volatility we have seen.  

A lot of the price action we are seeing is down to the unwind of the yen carry trade. This has seen a cheap source of funding for popular tech, gold and crypto long positions, disappear as the yen has strengthened hugely in a very short space of time. That has resulted in forced selling by funds caught on the wrong side, which also means bargain hunters will return. Going forward, the impact of a more hawkish Bank of Japan and dovish US Fed could be an important market driver if policy normalisation by the BoJ continues. There may well be further unintended consequences of this massive trade unwind in the months ahead.  

Going forward, the dollar will remain under pressure, even when stability in stock markets returns, as the Fed will kick off its policy easing soon. Money markets have probably got ahead of themselves by pricing in too many rate cuts in the near term. US CPI data next week will be key, as will the next NFP report at the start of September. As a Fed official reminded yesterday, it was only one jobs report last week so the Fed will not react immediately to that. Gold could also regain its footing amid ongoing geopolitical tensions and expectations of Fed rate cuts. 

Conclusion 

The 5 August 2024 stock market crash underscores the fragility and interconnectedness of global financial markets, driven by rapid shifts in policy and economic indicators. This event not only impacted stock valuations but also reverberated across forex and commodities markets, demonstrating the broad influence of US economic policies and global sentiment. 

As we navigate the complexities of global markets, it’s crucial to remain vigilant and adaptable. By understanding these market dynamics, you may find opportunities to trade Contracts for Difference (CFDs), which allow for both long and short positions in rising and falling markets. However, please be aware that trading CFDs involves significant risk and the potential for substantial losses. 

Open a live account with Vantage today and start leveraging your trading strategies in these dynamic market conditions to explore these opportunities. 

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