• U.S. stocks fell sharply on Monday due to recession fears and the unwinding of the yen carry trade.
• The Dow Jones dropped more than 1,000 points, while the Nasdaq 100 plunged 3.4%.
• The surprise interest rate hike by the Bank of Japan last week caused an increase in margin calls and forced sales.

U.S. stocks plummeted on Monday as investors worried about a possible recession and the side effects of unwinding the yen carry trade.

The Dow Jones Industrial Average tumbled more than 1,000 points, while the Nasdaq 100 fell around 3.4%, sinking further into correction territory. Even gold, a safe-haven asset, wasn’t spared, dropping nearly 1%.

A combination of risk factors caused Monday’s sharp decline, including ongoing concern over a weak July nonfarm payroll report from last week, news that Warren Buffett’s Berkshire Hathaway halved its stake in Apple in the second quarter, and poor earnings reports from Amazon and Intel.

All these factors have fueled fears that a recession could be imminent, especially considering that the Federal Reserve may be “behind the curve” in its failure to cut interest rates last month.

Here’s the status of U.S. indices as of Monday’s 4:00 p.m. close:

• S&P 500: 5,186.33, down 3%
• Dow Jones Industrial Average: 38,703.27 points, down 2.6% (-1,033.99 points)
• Nasdaq Composite: 16,200.08, down 3.43%

Some believe the Fed should implement an emergency rate cut, including Wharton professor Jeremy Siegel.

“I am calling for an emergency 75 basis point cut in the federal funds rate, with another 75 basis point cut indicated for next month at the September meeting, and that’s the minimum,” Siegel said Monday.

But perhaps the biggest driver of Monday’s stock market drop was the reversal of the yen carry trade.

“After such a strong rally since last fall, valuations, sentiment, and investor positioning had been stretched. What the markets are experiencing today is a reversal of that bullish positioning, which is particularly evident in the yen and the so-called carry trade,” LPL market strategists said.

A surprise interest rate hike by the Bank of Japan last week, combined with the prospect of interest rate cuts by the Federal Reserve, triggered a series of margin calls as the yen strengthened.

This led to a cascade of forced sales in the stock market, with Japan’s stock market experiencing its worst drop since 1987, falling 12%.

“A lot of money was raised in Japan at 0% interest rates and used to speculate elsewhere in the world, so I think all of that is unraveling and I think there are a lot of margin calls and I think it’s going to happen quite quickly and the sell-off should be over by the end of the week,” Ed Yardeni told Yahoo Finance on Monday.

Here’s what happened today:

• Nvidia chips used to power advanced artificial intelligence are reaching the Chinese military despite the U.S. blockade.
• The tech stock sell-off could herald the long-awaited AI reckoning. Although the stock market plummeted on Monday, some market sectors rose, including defensive sectors.
• A federal judge ruled Monday that Alphabet violated antitrust laws when it paid Apple to be the default search engine for the iPhone.
• West Texas Intermediate crude fell 0.97% to $72.81 a barrel. International benchmark Brent crude fell 0.90% to $76.12 a barrel.
• Gold fell 1.51% to $2,432.40 an ounce.
• The 10-year Treasury yield fell 9 basis points to 3.70%.
• Bitcoin fell 14.2% to $49,846.

By: Nestor Castillo, ForAllTech Director