Black Monday: Japan's Nikkei Suffers Worst Point Drop In History, VIX Hits 65

Japan’s Nikkei stock market just experienced its largest point drop in history. Closing the Monday session down 12.4% and sending shockwaves through global financial markets.

 Black Monday: Japan's Nikkei Suffers Worst Point Drop In History, VIX Hits 65 (photo credit: PR)
Black Monday: Japan's Nikkei Suffers Worst Point Drop In History, VIX Hits 65
(photo credit: PR)

The dramatic selloff then spread to the U.S. and other major economies.

The spark was the Bank of Japan's surprise interest rate hike last week. Then came the Federal Reserve's meeting on Wednesday, followed by weaker-than-expected U.S. manufacturing data on Thursday, and a weak labor report on Friday.

This has all led to an unwinding of the Yen carry trade. A large leveraged position that traders have put on for years, that allows them to borrow Yen at a lower interest rate and invest in US treasuries at a higher rate. The Bank of Japan's interest rate hike last Wednesday started an unwind of the position, and margin calls are now exacerbating the move.

The US indices were also significantly lower following large declines last Thursday and Friday. Especially after the weekend when reports emerged that Warren Buffett's Berkshire Hathaway sold half of its Apple position and is holding a company record $277 billion in cash.

As the US markets have declined, the grouping of large technology companies known as the "Magnificent Seven" has lost a combined $1.28 trillion in market cap over three sessions.

In response, the futures market pricing showed that expectations for Fed interest rate cuts surged on Monday morning. With Jeremy Siegel of Wharton's School of Business calling for 150 basis points of rate cuts.

"I'm calling for a 75 basis point emergency cut in the Fed funds rate, with another 75 basis point cut indicated for next month at the September meeting - and that's minimum," 

-Jeremy Siegel

The VIX volatility index surged to 65 on Monday, the highest level the VIX has hit since March 2020, shortly after the Federal Reserve's emergency actions during the Covid-19 pandemic when it rose to 85.

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Gold and silver prices were down sharply on Monday. Although the market's response to the chaos has already indicated expectations of an even earlier return to lower rates and easier money.

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