Morning Bid: Stocks reel on 'R-word' return, Nikkei dives 12%

Whether the prospect of a U.S. recession is real or imagined, the mere return of the discussion has been enough to send world stocks and bond yields reeling just as AI doubts and a Japan-led volatility spike have barreled into holiday-thinned August.

And as Japanese stocks were one of Buffett's top plays of the past year, that has alarmed an already nervy Tokyo market. And in a classic case of "be careful what you wish for", months of official intervention to buy yen and last week's second Bank of Japan interest rate rise of the year have finally succeeded - but it bowled over the stock market in spectacular fashion in the process.

U.S. stocks' eye-watering retreat last week came in the thick of a noisy and somewhat disappointing Big Tech earnings season, with fears about an overspend in artificial intelligence and the lack of an end result yet gnawing at investors. Even though the rule's author, former Federal Reserve economist Claudia Sahm, played down the warning this time around, the calculus of a half-point rise in the three-month average jobless rate above the low of the past year stands as a warning nonetheless.Fed futures markets now see a half-point cut in Fed rates as soon as next month and as much as 125 basis points of cuts by yearend.

Two-year yields fell as low as 3.69% and the two-to-10-yield curve steepened to within a whisker of positive territory for the first time in over two years - seen by some as a warning sign of recession ahead after two years of inversion.Critical now will be readings from the U.S. service sector later today, a reality check from Fed speakers and also the release of the Fed's quarterly senior loan officer survey.* U.S. July service sector surveys from ISM and S&P Global.

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