Global markets are beginning the week significantly down, largely due to a considerable sell-off spurred by the Bank of Japan’s decision to increase interest rates.

In response to the bank’s announcement to raise rates to 0.25%, Japan’s Nikkei 225 Index experienced its steepest decline since March 2020, falling by 5.9%. On Monday, the situation worsened, with the Nikkei enduring its largest drop on record, plummeting 12.6%.

Trading was halted multiple times across the Nikkei, Korea’s KOSPI, Turkey’s Borsa, and Robinhood, the world’s leading retail trading platform.

The cryptocurrency markets were not spared either, suffering significant losses. Data aggregator Coinglass reported that over $1.22 billion in liquidations occurred, primarily affecting long positions in Bitcoin (BTC) and Ethereum (ETH).

While the full extent of the impact is still unfolding, there are speculations that one or more major players in the industry may have faced severe consequences from the market movements.

However, in an interview with CNBC on Monday, Fundstrat’s Tom Lee indicated that this recent turbulence is more likely a “short and scary” event rather than the onset of a prolonged downturn. Lee emphasized that the Volatility Index (VIX), a well-known measure of anticipated stock market volatility, could provide insights into the next short-term moves. He also noted that the uncertainty arising from Japan should not have a substantial effect on U.S. markets.

“You need to keep an eye on the VIX. When it reaches its peak and begins to decline, recovery can happen swiftly. Much of this hinges on whether financial conditions in the U.S. start to tighten, meaning do markets seize up. However, with interest rates decreasing and consumers maintaining a solid position, I believe that we’ll see this as more of a growth scare on the other side…

The 2-Year Treasury yield indicates that the Fed may be lagging behind, given that it has decreased further. It appears that much of this reaction stems from Japan’s unexpected rate hike and its ripple effects. If this is indeed the main driver of the market reaction, it could be tumultuous for the markets, yet not necessarily detrimental to the U.S. economy, and I think we may see a rebound.”

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Featured Image: Shutterstock/Olivier Le Moal