The US market suddenly exploded! Asia-Pacific follows the decline, with the Nikkei plunging 4%

Weak overnight US manufacturing data reignited concerns about the world's largest economy, leading to a sharp decline in chip stocks led by NVIDIA and a plunge in US stocks. In early trading on Wednesday, the Asia-Pacific stock market followed suit with a sharp drop.

As of the time of writing, the Nikkei 225 index fell by 4% intraday to 37,126.52 points, heading towards its largest decline since the crash on August 5. The TOPIX index fell by 3% at one point, with the energy sector leading the decline as overnight crude oil futures plunged. The South Korean KOSPI index opened down by 2.8%, while the MSCI Asia-Pacific index fell by over 1%. Amid risk aversion, the Japanese yen appreciated significantly, with the US dollar falling below 145 yen, down 0.32% intraday.

At the same time, European and American stock index futures showed significant declines, with Dow futures down by 0.2%, S&P 500 index futures down by 0.3%, and Nasdaq futures down by nearly 0.5%. European STOXX 50 index futures fell by 0.65%, UK's FTSE 100 index futures fell by 0.49%, and Germany's DAX index futures fell by 0.63%.

The S&P 500 index and the Nasdaq 100 index have seen their worst September start since 2015 and 2002, respectively. With stable inflation expectations, attention has turned to the health of the economy, as signs of weakness could accelerate policy easing. While rate cuts are often a positive signal for the stock market, the situation is usually different when the Federal Reserve is eager to prevent an economic downturn.

Traders expect the Fed to cut rates by over two percentage points in the next 12 months, marking the largest cut since the 1980s outside of economic downturns. Ian Lyngen and Vail Hartman of BMO Capital Markets stated that the anxiety following the latest rise in unemployment rate will make traders "nervous" ahead of Friday's nonfarm payroll data release.

"While this week's employment report is not the sole determinant, it could be a key factor in the Fed's decision to cut rates by 25 or 50 basis points," said Jason Pride and Michael Reynolds of Glenmede. "Even a modest signal from this week's employment report could be a key decision point for the Fed on whether to take a more cautious or aggressive approach."

Michael Wilson, a strategist at Morgan Stanley who predicted last month's market correction, stated that if Friday's employment data provides evidence of economic resilience, companies lagging behind the US stock market rebound may receive a boost. Stronger-than-expected employment data could give investors "greater confidence that growth risks have receded".

According to Bloomberg's survey of economists, the August employment report is expected to show an increase of around 165,000 jobs in the world's largest economy. While this is higher than the modest increase of 114,000 jobs in July, the average job growth over the past three months is expected to slow to slightly above 150,000, the smallest increase since early 2021 The unemployment rate in August may slightly decrease from 4.3% to 4.2%.

Neil Dutta from Renaissance Macro Research stated that although the Federal Reserve will eventually decide to cut interest rates, he does not believe that a series of 25 basis point cuts will be effective. In this case, it will take a long time to return the fund rate to neutral, during which time policy will remain restrictive, posing downside risks to economic growth.

He said, "This situation of muddling through may lead to further increase in the unemployment rate. So, if they do not cut rates by 50 basis points in September, they will need to cut rates by 50 basis points later this year."