Global markets are opening the week sharply lower, grappling with a significant sell-off that has been partly instigated by the Bank of Japan’s unexpected decision to increase interest rates.

Following the central bank’s move to elevate rates to 0.25%, Japan’s Nikkei 225 Index suffered its most severe decline since March 2020, plummeting by 5.9%. The situation worsened on Monday, as the Nikkei recorded its largest single-day drop ever, plunging 12.6%.

Trading was suspended multiple times across various indices, including the Nikkei, Korea’s KOSPI, and Turkey’s Borsa, as well as on Robinhood, the world’s leading retail trading platform.

In the cryptocurrency sector, the fallout has been equally harsh, with data aggregator Coinglass reporting over $1.22 billion in liquidations, primarily affecting long positions in Bitcoin (BTC) and Ethereum (ETH).

While the full impact of this turmoil is still unfolding, there is growing speculation that one or more major players in the market may have suffered significant losses due to the sudden shift.

However, during an early Monday interview with CNBC, Tom Lee of Fundstrat expressed the view that this recent downturn is likely a “short and scary” episode rather than a signal of a prolonged decline. He pointed to the Volatility Index (VIX), a well-known measure of anticipated stock market fluctuations, as a potential indicator for the market’s next direction. Lee noted that the uncertainty arising from Japan’s rate hike should not have a substantial impact on U.S. markets.

“You need to monitor the VIX,” he advised. “When the VIX reaches its peak and begins to decline, the recovery can occur rapidly. Much of this depends on whether U.S. financial conditions begin to tighten, indicating a potential market squeeze. However, with interest rates decreasing and consumers remaining relatively stable, I believe that on the other side of this, we may just be facing a growth scare.

The 2-Year Treasury yield suggests that the Fed may be lagging behind, as it has dropped further. In retrospect, it appears that much of this volatility stems from the unexpected rate hike in Japan and its ripple effects. If this is indeed the primary catalyst for the market’s reaction, while it may lead to a tumultuous period for markets, it doesn’t necessarily spell bad news for the U.S. economy, and I believe we can recover from this.”

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