Market sentiment is a notoriously fickle beast and like a teenager in a tortured romantic relationship, it can seemingly thrive on chaos.

Following a weekend of high anxiety after weak US jobs data issued on Friday, the fear factor ratcheted up yesterday with stock market indices around the world tumbling on concerns that the engine room of the global economy is on the cusp of falling into recession. Asian stocks kicked off the day’s global trading with their worst route in decades, with Japan’s Nikkei 225 falling by more than 12% to surpass losses suffered on Black Monday in October 1987.

European markets followed suit including London’s FTSE 100 which finished yesterday’s trading down by more than 2%, its worst day of the year so far. As America woke up the morning broadcasters were delivering dire yet breathless predictions of further financial misery for investors as economists debated whether the US Federal Reserve will be forced into an emergency interest rate cut to prop up the slowing economy.

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“This is the moment we have been waiting for,” declared CNBC host Dan Neuner.

“The Fed will need to react really fast to avoid a meltdown that could make 2008 look like a joke. It’s an election year. I’m expecting emergency action.”

Mark Tepper, chief executive of Strategic Wealth Partners, told Fox News that things obviously look “pretty dire right now” as Wall Street’s so-called “fear gauge”, the Cboe Volatility Index (VIX), jumped to its highest level in more than four years. It was up by as much as 172% to 62.27 before trading opened on Monday, marking the highest level since the onset of the Covid pandemic in March 2020.

Weaker than expected jobs and manufacturing data have sparked concerns that the US Fed has left it too late to begin cutting interest rates currently sitting at a 23-year high. Analysts at JP Morgan say it’s a 50-50 shot whether the US will fall into recession, while Goldman Sachs has raised its odds to a 25% chance of recession within the next year.

Amid this trading cacophony debate has broken out as to whether the Fed will take the unusual move of calling an emergency gathering before its next scheduled meeting to cut interest rates in an effort to quell the tumult. If so, it would be the board’s first unscheduled decision since the outbreak of Covid.

It was only Wednesday of last week that the Fed decided to keep rates unchanged at 5.5%, even though its chair Jerome Powell acknowledged there were early signs of a slowing economy. The Fed also guided towards expectations of a rate cut in September.

To jump early and just a week after its last scheduled meeting would be quite extraordinary, yet traders are now pricing in a roughly 60% chance of the Fed doing just that.

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Either way, more than 120 basis points of cuts are expected by the end of this year, versus around 50 basis points at the start of last week. If the Fed doesn’t go early, markets have fully priced in a hefty half-point cut in September.

Nigel Green, chief executive of the deVere financial advisory group, said it would be “beyond negligent” if the Federal Reserve does not announce an emergency cut.

“The Fed was behind the curve at the beginning of the cycle, it cannot afford to be behind the curve this time too,” Mr Green said. “The US central bank needs to take action now, and start to bring down rates from a more than two-decade high, or there could be legitimate and far-reaching risks of a hard landing.”

He added: “We hope the Fed will announce an emergency cut of 25 basis points this week, and another in September, to quell speculation and the growing sense of panic.”

Though Mr Green is not alone in this view, there is a good deal of evidence to support the judgement that an emergency cut would be a mistake that would further stoke panic rather than subdue it.

Over the weekend analysts at Goldman Sachs raised their expectation of a US recession from 15% to 25%, but added there are several reasons not to fear a slump in that the economy continues to look “fine overall” with growth of 2.8% in the April to June period.

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Others have further pointed out that the jobs data doesn’t support the scale of yesterday’s global meltdown, with the answer instead likely to be found in the increasing strength of the yen as it has rallied by more than 11% against the dollar from 38-year lows hit just a month ago. This recovery has been supported last month’s increase in Japanese interest rates to “around 0.25%”, a surprise decision that came just hours before the Fed opted to keep its cost of borrowing on hold.

Analysts say this appears to have triggered a sharp unwinding of carry trades, where investors borrow money from economies with low interest rates such as Japan or Switzerland to fund investments in higher-yielding assets elsewhere, such as US technology stocks. When this happens investors must quickly sell assets to cover currency losses, which causes ripples across all markets.

Roll this together with the blow to tech sector confidence after legendary investor Warren Buffett recently sold off half his stake in Apple, and it’s pretty clear why the tech-focused US Nasdaq was down by more than 4% at one point yesterday.

But emergency cut or no, what is evident is that US interest rates will be coming down at a relatively fast and furious pace in the coming months, in stark contrast to what’s expected here closer to home.

The UK’s Monetary Policy Committee said last week that it will not go too far nor too fast after last week’s initial quarter-point cut to 5%. Similarly, the European Central Bank has not indicated any path for further policy easing after cutting rates from 4% to 3.75% in June.

With geopolitical strains and a bitter presidential election coming up in the US, there are certainly more tumultuous times in store for the world’s financial markets as events play out across our highly interconnected global economy.