Wall Street finished sharply lower on Monday, closing out a global market rout that saw Japan’s main stock index suffer its worst day in 37 years.

Wall Street’s benchmark S&P 500 dropped 3 per cent, its sharpest one-day drop since September 2022, while the tech-dominated Nasdaq Composite fell 3.4 per cent. 

The sell-off was broad-based, with more than 95 per cent of stocks in the S&P 500 falling, but large tech companies that had driven much of this year’s earlier market rally were among the worst hit. Shares in Nvidia fell as much as 15 per cent in early trading, before closing down 6 per cent.

The market has suddenly moved “from a warm summer’s day straight into autumn”, said Antonio Cavarero, head of investments at Generali Asset Management.

Still, conditions by the end of Monday were better than they had been earlier in the day. The Vix index of expected US stock market turbulence, commonly known as Wall Street’s “fear gauge”, was at 38 by Monday evening. That is well above its recent levels and its long-term average of around 20, but far below the four-year high of 65 it hit earlier on Monday.

Likewise, the S&P and Nasdaq both recovered some of their morning losses.

Markets, which have been rising for most of this year, fell amid fears the Federal Reserve has been too slow to respond to signs the US economy was weakening, and might be forced to play catch-up with a series of rapid interest rate cuts.

Markets are now expecting 1.17 percentage points of cuts over the Fed’s final three meetings of the year, suggesting one or two jumbo half-point interest rate cuts and one quarter point cut. Early speculation about an emergency cut before the Fed’s September meeting was mostly erased by end of day.

“This is a market tantrum,” said Priya Misra, a portfolio manager at JPMorgan. “I think the market will continue to panic until the Fed shows signs of moving.”

The global sell-off was exacerbated by the unwinding of the so-called yen carry trade, in which traders had taken advantage of Japan’s low interest rates to borrow in yen and buy risky assets.

Tokyo’s Topix fell 12.2 per cent, the sharpest sell-off since “Black Monday” in October 1987 and more than erasing its gains for the year.

The yen has strengthened by about 12 per cent since mid-July, helped by last week’s interest rate rise from the Bank of Japan, including a gain of 1.9 per cent to ¥144.11 against the dollar on Monday.

“The pockets of pain are in those trades that were based on cheap funding in the Japanese yen space and anything in tech,” said Cavarero. “This looks like a healthy, long-overdue market correction,” he added. 

The Fed kept rates on hold when it met last week, but weaker than expected US jobs data on Friday led some investors to conclude that the central bank erred in not cutting rates.

“I think interest rates are too high,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. While the economy was still “relatively strong”, the Fed needed to get rates to about 4 per cent “sooner rather than later”, Rieder said.

However, others said a rapid fall in rates was unrealistic and an emergency move could be counterproductive and create panic.

“I think the market has gotten completely ahead of itself in terms of interest rate cuts being priced in at this point,” said John McClain, portfolio manager at Brandywine Global. An intra-meeting cut is “like shouting fire in a crowded theatre”, he said.

Adding to the pressure on markets, on Saturday Warren Buffett’s Berkshire Hathaway disclosed that it had halved its position in Apple in the second quarter, while raising its cash position to a record $277bn and buying Treasuries.

Retail investors were also unnerved on Monday by problems accessing their brokerage accounts at companies such as Fidelity and Charles Schwab.

Republicans including Donald Trump seized on the market moves to attack the Biden administration and Kamala Harris, the Democratic presidential nominee. 

“Voters have a choice — Trump prosperity or the Kamala Crash and Great Depression of 2024,” the former president wrote on Truth Social, his social media platform, in capital letters on Monday morning.

However, Wall Street later pared some of its heavier losses after US ISM services sector data came in slightly above expectations. “Today was a reminder, with ISM, that this is not an economy that is collapsing,” said Daniel Ivascyn, chief investment officer at Pimco.

Traders in Tokyo said Monday’s plunge was sparked by an exodus of global investors from the Japanese market, which had notched up sizeable gains earlier in the year.

“Japan seems to be the epicentre of a lot of movement today,” said Jason Liu, head of Apac equity and derivative strategy at BNP Paribas. “There appears to be a genuine broad-based Japan liquidation by global funds.”

Trading in both Topix and Nikkei futures were suspended during the afternoon session as the selling frenzy continued into the close, hitting “circuit breaker” levels that automatically stop trading. In South Korea, similar circuit breakers were triggered for the first time in four years.

South Korea’s Kospi benchmark fell 8.8 per cent while the Australian S&P/ASX dropped 2.5 per cent. India’s Sensex lost 2.7 per cent.

In Europe, the benchmark Stoxx Europe 600 shed 2.2 per cent. The UK’s FTSE 100 fell 2 per cent.

The global turbulence extended to the cryptocurrency market, with the price of bitcoin falling 14 per cent at one point to $53,789, while the price of ether, another cryptocurrency, fell as much as 21 per cent to $2,390. By mid-afternoon bitcoin was down 8 per cent and ether was down 11 per cent.