Nikkei 225 Plunges 7% on US Economy Fears

Bangkok, Aug 5 (AP) Japan's benchmark Nikkei 225 stock index plunged as much as 7.1% early Monday before recovering some lost ground, extending sell-offs that began last week.

At one point, the Nikkei shed more than 2,500 points. By the time of the Tokyo market's midday break, the index was down about 5.5%, or about 1,900 points, at 33,945.43.

The market's broader TOPIX index fell as much as 7.8% before recovering to trade down 6.6%.

Stocks tumbled Friday on worries the US economy could be cracking under the weight of high interest rates meant to tame inflation. Early Monday, the future for the S&P 500 was 1.4% lower and that for the Dow Jones Industrial Average was down 1.5%.

“To put it mildly, the spike in volatility-of-volatility is a spectacle that underlines just how jittery markets have become,” Stephen Innes of SPI Asset Management said in a commentary. “The real question now looms: Can the typical market reflex to sell volatility or buy the market dip prevail over the deep-seated anxiety brought on by this sudden and sharp recession scare?”

A report showing hiring by U.S. employers slowed last month by much more than expected has convulsed financial markets, vanquishing the euphoria that had taken the Nikkei to all-times highs of over 42,000 in recent weeks.

Investors will be watching for data on the U.S. services sector from the U.S. Institute for Supply Management due later Monday that may help determine if the sell-offs around the world are an overreaction, Yeap Jun Rong of IG said in a report.

Elsewhere in Asia, Taiwan's Taiex saw the largest decline, sinking 7.4%. Market heavyweight and computer chip maker Taiwan Semiconductor Manufacturing Co. lost 5.3%.

Hong Kong's Hang Seng index lost 2.1% to 16,945.51 and the S&P/ASX 200 in Australia declined 1.3% to 7,725.40. South Korea's Kospi declined 3.4% to 2,570.64.

On Friday, the S&P 500 sank 1.8% for its first back-to-back losses of at least 1% since April. The Dow Jones Industrial Average dropped 610 points, or 1.5%, and the Nasdaq composite fell 2.4% as stocks retreated around the world and back to Wall Street.

Friday's losses for tech stocks dragged the Nasdaq composite 10% below its record set last month. That level of drop is what traders call a “correction.”

The rout began just a couple days after U.S. stock indexes had jumped to their best day in months after Federal Reserve Chair Jerome Powell gave the clearest indication yet that inflation has slowed enough for cuts to rates to begin in September.

Now, worries are rising the Fed may have kept its main interest rate at a two-decade high for too long, raising risks of a recession in the world's largest economy. A rate cut would make it easier for U.S. households and companies to borrow money and boost the economy, but it could take months to a year for the full effects to filter through.

“Specifically, the scenario of higher unemployment constraining spending and further restraining hiring and incomes and economic activity leading to a recession is the feared scenario here,” Tan Boon Heng of Mizuho Bank in Singapore said in a report.

Worries over weakness in the U.S. economy and volatile markets have rippled around the world, even though the U.S. economy is still growing, and a recession is far from a certainty.

The Nikkei 225 dropped 5.8% on Friday. It has struggled since the Bank of Japan raised its benchmark interest rate on Wednesday and is now at about the level it was when the year began.

The sell-offs on Friday and Monday were among the worst ever for the index, which saw its biggest rout during the market meltdowns of Black Monday in October 1987.

The modest rate hike, to just 0.25% from 0.1%, pushed up the value of the Japanese yen against the U.S. dollar, which could hurt profits for exporters and deflate a boom in tourism. But worries over the U.S. economy seem to be a larger factor driving investors to dump stocks.

Early Monday, the dollar was trading at 145.50 yen. That's sharply below its level of over 160 yen a few weeks ago. (AP)