Wall Street plunges as US recession fears hurt risk appetite

By Shubham Batra and Shashwat Chauhan

(Reuters) -Wall Street's main indexes slumped on Monday as risk appetite among investors dropped on fears of a U.S. recession following weak economic data last week, sending tremors across global markets.

Market worries eased a bit as the day progressed and stocks pared losses after data showed U.S. services sector activity in July rebounded from a four-year low amid a rise in orders and employment.

Traders attributed some weakness in stocks also to unwinding of sharp positions of carry trades, where investors borrow money from economies with low interest rates such as Japan or Switzerland to fund their bets in high-yielding assets elsewhere.

The so-called Magnificent Seven group of stocks - the main driver for the indexes hitting record highs this year - were set to lose a combined $650 billion in market value.

Apple fell 3.9% after Berkshire Hathaway halved its stake in the iPhone maker, in a sign that billionaire investor Warren Buffett is growing wary about the broader U.S. economy or lofty stock market valuations.

Nvidia slid 6.1%, while Microsoft and Alphabet fell about 3% each.

"A 5%+ stock market correction is not unusual given the 15% return in the first half and the balanced risks in this late-stage economic cycle," said Jason Pride and Michael Reynolds at Glenmede.

"Investors should actively rebalance portfolios back to long-term policies and closely monitor risks that could tip the U.S. toward recession."

At 11:30 a.m. ET, the Dow Jones Industrial Average was down 863.70 points, or 2.17%, at 38,873.56, the S&P 500 was down 129.55 points, or 2.42%, at 5,217.01, and the Nasdaq Composite was down 465.25 points, or 2.77%, at 16,310.92.

A weak jobs report and shrinking manufacturing activity in the world's largest economy, coupled with dismal forecasts from the big U.S. technology companies, pushed the Nasdaq 100 and the Nasdaq Composite into a correction last week.

The disappointing jobs data also triggered what is known as the "Sahm Rule", seen by many as a historically accurate recession indicator.

Traders now see an 92.5% probability that the U.S. central bank will cut benchmark rates by 50 basis points in September, compared with an 11% chance seen last week, according to CME's FedWatch Tool.

Chicago Fed President Austan Goolsbee downplayed recession fears, but said Fed officials need to be cognizant of changes in the environment to avoid being too restrictive with interest rates.

The CBOE Volatility index, also known as Wall Street's "fear gauge", breached its long-term average level of 20 points last week and was now at 72.94.

U.S. Treasury yields tumbled to their lowest in a year and a closely watched gap between two- and 10-year Treasury notes turned positive for the first time since July 2022, usually indicating the economy is heading into a downturn. [US/]

All the 11 major S&P 500 sectors were trading lower, with information technology and financials the worst hit.

Pringles maker Kellanova soared 14.1% after a Reuters report said candy giant Mars was exploring a potential buyout of the company.

Declining issues outnumbered advancers for a 11.64-to-1 ratio on the NYSE and by 8.59-to-1 ratio on the Nasdaq.

The S&P index recorded 13 new 52-week highs and 26 new lows, while the Nasdaq recorded nine new highs and 476 new lows.

(Reporting by Shubham Batra and Shashwat Chauhan in Bengaluru; Editing by Saumyadeb Chakrabarty and Arun Koyyur)