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Less worries about stock trading

Asia-Pacific stock markets open in a precarious situation!

In the early trading today, the Asia-Pacific stock markets collapsed across the board. The Nikkei 225 index fell rapidly after opening sharply lower, with the largest drop of nearly 5%; the Korean and Australian stock indices also experienced a plunge of more than 2%. So, what exactly happened?

Analysts believe that it may still be related to the yen carry trade. Historically, the trend of the yen and Japanese interest rates in 2000 and 2007 triggered huge shocks in the global capital market. Behind this may be the reversal of the carry trade, which has caused pressure on the equity market and commodities, but is bullish for gold prices. In a tightening environment, Japanese bond interest rates are generally rising, and the impact on US bond interest rates is complex.

Meanwhile, some of the latest data from the United States has raised concerns about a recession and the idea that it may be too late for the Federal Reserve to start cutting interest rates. The number of first-time applications for unemployment benefits recorded the largest increase since August 2023. The ISM manufacturing index, a barometer of U.S. manufacturing activity, was 46.8%, lower than expected, a signal of economic contraction. After the release of these data, the 10-year U.S. Treasury yield fell below 4% for the first time since February. But in fact, it is not a recession that is scary, but stagflation.

Japanese stocks triggered a sell-off

In the early trading today, the Japanese stock market fell like crazy. The Nikkei 225 index fell rapidly after a sharp opening, with the largest drop of nearly 5%. Mitsubishi UFJ Financial Group's share price fell by 10%, the largest drop since March 2020. The Tokyo Stock Exchange Bank Index fell by 6.4%. Mitsubishi UFJ Financial and Hitachi fell by more than 8%, while Toyota Motor and Sumitomo Mitsui Financial fell by more than 4%. Japanese government bonds rose, and the 10-year government bond yield fell below 1%, which means that funds are pouring into the bond market for risk aversion.

At the same time, the stock indices of South Korea and Australia also collapsed across the board, with declines of more than 2%. The Korean Composite Index fell 2.6% at one point, the biggest drop since April 19. The Korean Kospi Index fell nearly 1% this week and is set to fall for the fourth consecutive week. The top ten stocks in the Korean Kospi Index fell across the board, and all industry indices fell across the board. SK Hynix fell more than 5%, Samsung Electronics, LG Energy Solution, Hyundai Motor, and Kia Motors fell more than 2%.

From the perspective of the foreign exchange market, the Japanese yen continued to strengthen. However, it is worth noting that the US dollar index did not weaken significantly again. This means that other currencies did not follow the Japanese yen in strengthening.

Why the crash

So, what happened to trigger such a huge sell-off? Analysts believe that there are two main reasons: first, the U.S. stock market plunged last night, and some "recession trades" may have emerged behind it, and the explosion of the semiconductor sector also caused some concerns; second, the appreciation of the yen and the reversal of carry trades have led to an increase in expectations of global funds flowing back to the yen.

Last night, the Dow Jones Industrial Average fell 494.82 points, or 1.21%, to 40,347.97. At its intraday low, the 30-stock index fell 744.22 points, or about 1.8%. The S&P 500 fell 1.37% to 5,446.68, while the Nasdaq Composite fell 2.3% to 17,194.15. The Russell 2000, a recently-rising benchmark for small-cap stocks, fell 3%. All three major stock index futures continued to fall in early trading today.

Yesterday's first-time jobless claims in the United States hit the largest increase since August 2023. The ISM manufacturing index, a barometer of U.S. manufacturing activity, was 46.8%, lower than expected, a sign of economic contraction. After the release of these data, the 10-year U.S. Treasury yield fell below 4% for the first time since February. Judging from the capital market and data, it is clear that the market has begun to worry about a recession. Chris Rupkey, chief economist at FWDBONDS, said Thursday's data hinted at an economic downturn amid volatility. Last night, stocks that suffered the most during the recession also performed the worst, with JPMorgan Chase falling 2.3% and Boeing falling more than 6%.

In addition, the Japanese stock market fell sharply yesterday, but the global market did not react until several hours later. On July 31, 2024, the Bank of Japan simultaneously adopted "interest rate hikes + quantitative tightening (Taper)", and gave a relatively rare hawkish guidance that "if the economic activity and price outlook is realized, interest rates will continue to be raised and easing measures will be adjusted."

According to Industrial Bank Research, the recent changes in the yen show the widespread and significant impact of Carry Trade Unwind. From the perspective of the carry return risk ratio (US-Japan 10-year Treasury bond spread/1-year USD/JPY option implied volatility), the attractiveness of the yen as a financing currency this round is slightly higher than in 2019, but lower than in 2007. From the perspective of short positions, the popularity of this round of Carry Trade has exceeded that of 2019 and is close to that of 2007.

They believe that this round of Carry Trade using the Japanese yen as a financing currency has begun to reverse. In the future, as market sentiment switches to risk-on and the US dollar exchange rate and interest rates rebound, the carry return-risk ratio will rebound temporarily, but the general direction of the Carry Trade shift has been basically confirmed.

The reversal of Carry Trade has disturbed global capital flows and asset prices. From the perspective of liquidity, the month-on-month change in the total government bond assets held by the Bank of Japan is correlated with the TGA balance of the US Federal Reserve Account and the US dollar SOFR interest rate. As the Bank of Japan launches quantitative tightening, it will lead to a tightening of global liquidity at the margin. On the other hand, this may prompt the Federal Reserve to cut interest rates. Historically, the first two rounds of monetary policy tightening by the Bank of Japan lagged significantly behind the Federal Reserve and the European Central Bank, and are relatively close to the next round of interest rate cuts and economic recessions by the US and European central banks.

According to the observation of Securities China reporter, the SOFR interest rate has also risen significantly recently.

Source: China Securities

Statement: All information content of Databao does not constitute investment advice. The stock market is risky and investment should be cautious.

Editor: He Yu

Proofreading: Peng Qihua

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