Weak US employment report sends global markets careening off track

Weaker-than-expected US jobs data has put global markets on a slippery slope. Over the past two days, US, European, and Asian markets have dropped more than 3 per cent. The two-year US Treasury yield has decreased by 15 basis points, and oil prices have also declined.

In July, the US, the world’s largest economy, added just 114,000 jobs, falling short of the Street’s projection of 175,000. This data has fuelled concerns about a hard landing in the US and fears that the Federal Reserve (Fed) may be behind the curve in avoiding a recession.

Indian markets also fell more than 1 per cent on Friday, with the benchmark National Stock Exchange Nifty ending at 24,718.

“A correction appears to be underway. Shares surged into July due to better news on inflation, increasing optimism about lower interest rates, and favourable information technology earnings reports. Our view is that lower interest rates will boost shares over a six- to 12-month period, provided a recession is avoided. However, in the coming months, global shares seem vulnerable to further declines, suggesting it’s too early to buy the dip,” said Shane Oliver, chief economist and head of investment strategy at AMP Investments.

The fall in domestic markets was less pronounced compared to global peers, thanks to domestic liquidity support. However, experts warn that if global markets continue to correct, Indian markets will also feel the pressure.

“Currently, weak global cues are weighing on sentiment, which could lead to further declines. A potential retest of the short-term moving average for the Nifty, currently around the 24,550 level, is possible. A decisive break below this level could place bulls on the back foot, with the next support at 24,200. On the upside, 25,100 will continue to act as strong resistance,” said Ajit Mishra, senior vice-president of research at Religare Broking.

The India Vix also surged 11.4 per cent to 14.32 on Friday, as traders anticipate increased volatility this week.

“The sharp drop in job creation in the US and the rising unemployment signal a growing possibility of a US recession, which the market had previously discounted. The likelihood of a rate cut by the Fed in September is high. Consequently, the US 10-year bond yield has fallen sharply to 3.79 per cent. Although this is positive for flows into emerging markets (EMs), foreign portfolio investors (FPIs) may consider withdrawing more funds from India, currently the most expensive EM. Developments in the US economy and markets in the coming days will set the trend for FPIs in August,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.