news

In the past two weeks, the volatility of global markets has risen sharply, and last Friday (August 2) was a "Black Friday". On that day, not only did the Nikkei index fall by a rare 5.8%, but the Asia-Pacific stock market and the US stock market also fell by more than 2%. After the release of the US non-farm payrolls data, the VIX "fear index" soared to an 18-month high.

Since July, a series of risk points have converged. First, the U.S. stock market started to rotate three weeks ago, and the plunge of large-cap technology stocks caused the stock index to fall; then the yen began to rebound, and then the Bank of Japan unexpectedly started to raise interest rates and shrink its balance sheet. The U.S. dollar fell by about 8% against the yen in two weeks, and the U.S.-Japan interest rate gap narrowed sharply, leading to the liquidation of carry trades. At the same time, the financial reports of U.S. technology giants were lower than expected, which aggravated the decline of the U.S. stock market. The funds flowing back to Japan further pushed up the yen, causing the Japanese stock market to plummet, and the export-oriented sectors were the first to bear the brunt; misfortunes never come alone. The U.S. non-farm data for July released on August 2 showed that the unemployment rate rose to 4.3% (previous value was 4.1%), a nearly three-year high, which triggered the "Sahm ​​Rule" with a 100% accuracy rate in predicting recessions. A "recession trade" is ready to move, and even the expectation that the Federal Reserve will cut interest rates in September is difficult to ease market anxiety.Goldman SachsIt was even mentioned that if subsequent employment data continues to fall short of expectations, the Federal Reserve may make an emergency interest rate cut of 50 basis points (BP) in September.

Eric Robertsen, global chief strategist at Standard Chartered, told reporters that yen-based carry trades were widely liquidated, but the prospect of a rate cut by the Federal Reserve seemed to be alleviating some of the risk aversion that had plagued market sentiment. As the US election approaches, if polls are close and the market is worried about election disputes, risk aversion may outweigh the boost from rate cuts. "Of course, if the current global 'soft landing' narrative turns into concerns about a 'hard landing,' risk premiums could increase further. This would not only cause global interest rates to fall sharply, but could also push the dollar higher again."

Carry trade liquidation shock wave continues

The Bank of Japan has always been known for its "surprise" actions, and this time is no exception. On July 31, the Bank of Japan announced a 15BP rate hike, which was much earlier than the market consensus in September or October, and the rate was also higher than the 10BP expected. At the same time, the Bank of Japan announced a specific plan to gradually reduce its purchase of government bonds, aiming to reduce the monthly bond purchase to 3 trillion yen in March 2026.

The Japanese stock market has attracted global funds with its sharp growth in the past two years, but the hawkish Bank of Japan has caused a recent sell-off in the Japanese stock market. The yen closed at 146.25 against the US dollar on August 2, an increase of nearly 10% from its previous historical low.

The storm in Japan was not limited to its domestic market. The volatility spread across the world. As the yen soared and U.S. Treasury yields fell (the 10-year Treasury yield fell from a high of more than 5% to 3.8%), the appeal of the carry trade disappeared. If traders had previously financed themselves with cheap yen and invested in high-yield markets to capture high returns, they would now lose the high-yield assets and the yen. This stunning reversal triggered a global liquidation of the carry trade.

"The attractiveness of carry trades has plummeted, with EUR/JPY, GBP/JPY and AUD/JPY all seeing sharp sell-offs in the past week," James Stanley, senior strategist at Forex, told reporters. "This process will continue to impact the market. As prices fall further, previous long positions will have a stronger motivation to liquidate, thereby locking in some of the floating profits achieved previously. Carry trades have shown more signs of coming to an end, and if we don't act now, the floating shadows may become a bubble."

As carry trades unwind, volatile currency pairs (currency pegs) have seen sharp reversals, with the high-yielding Mexican peso-yen cross, for example, down 11% from its July peak.

In addition to the factors of the yen itself, the current plunge in US technology stocks is still continuing, and US Treasury yields have also plummeted due to recession concerns, which means that the losses of carry trades will only expand further, and the pressure to liquidate will continue to increase.

The Nasdaq 100 index closed at 18,440.85 on August 2, retreating nearly 11% from its previous all-time high of 20,700 points.

Even more worrying was the earnings results of tech giants that came out after the market closed last Friday.IntelThe company reported dismal performance and a pessimistic outlook, and announced a dividend freeze and 15% layoffs, causing its stock price to plummet by 20%;AmazonSecond-quarter revenue and third-quarter outlook fell short of expectations, and the stock price fell 6%;appleThe overall performance was better than expected, with strong growth in the services sector offsetting the year-on-year decline in iPhone revenue. The stock price fell 0.6% after the market.

The US "soft landing" narrative begins to reverse

To make matters worse, as volatility soared, a "recession trade" began to take shape. Market participants now believe that the Fed should cut interest rates at the end of July instead of waiting until September.

Non-farm payrolls data pushed "Black Friday" to a climax. The number of non-farm payrolls in the United States increased by only 114,000 in July (the consensus was 175,000), which was also one of the weakest data since the outbreak of the COVID-19 pandemic. More importantly, the unemployment rate unexpectedly climbed to 4.3%, exceeding the 4.1% expected by economists, and rose for four consecutive months.

This has triggered concerns that the US economy will decline more sharply and even fall into recession, causing US stocks to plummet and pushing down US Treasury yields. Gold prices have also hit record highs due to safe-haven demand.

In fact, the US economic data released in the same week were not as expected. The weak ISM manufacturing report released on August 1 has sounded the alarm for recession. Not only did the overall PMI index shrink at the fastest rate in 8 months, but employment and new orders also shrank at a faster rate. On the same day, the 10-year US Treasury yield fell below the 4% mark.

On the same day, Fed Chairman Powell said at the interest rate meeting that if inflation data is in line, interest rate cuts will be discussed at the September meeting. His remarks indicate that the threshold for interest rate cuts is not high. However, Goldman Sachs believes that the controversy over labor market conditions is heating up, especially the rising unemployment rate, which may indicate a larger slowdown.

Goldman Sachs believes that if the August employment report continues to be weak, an emergency rate cut of 50BP may be carried out at the September meeting. The agency still expects the ultimate interest rate to be 3.25%~3.5% (currently 5.25%~5.5%), and has not changed its forecast of a 25BP rate cut every other meeting in 2025 and 2026, partly because it believes that there is greater uncertainty in economic policy after the election.

In fact, the inversion of the U.S. Treasury yield curve has lasted for nearly 42 months, which is longer than the Great Depression in the 1930s. Previously, no one took this downward recession indicator seriously.

"But now that the Sam Rule has been triggered, this recession fear is beginning to dominate. The question now is whether the Fed is lagging behind the situation because the U.S. labor market is continuing to weaken. The Fed expected the probability of a recession to be 55.8% in July, and this week's Treasury volatility further deepened the inversion of the yield curve," James Stanley told reporters.

Asian stock market volatility rises

Currently, the money market has begun pricing in a 200BP rate cut in the United States by the end of 2025. Is this a blessing or a curse for Asian stocks?

Goldman Sachs' latest research shows that historically, Asian stocks have generally performed positively after the Fed's first rate cut, but have performed poorly in a recessionary environment. Under different macro conditions, the healthcare and consumer sectors performed best after the Fed's first rate cut, while defensive and commodity sectors outperformed global cyclical sectors and financial sectors in a recessionary context.

Just last week (July 29-August 2), the MXAPJ (MSCI Asia ex Japan Index) fell 0.8%, mainly dragged down by the Philippines, Taiwan, China and South Korea (down 2% each), while Thailand, Australia and Indonesia outperformed the market. Taiwan's stock market has seen strong foreign capital outflows for a week in a row (-US$3.5 billion), and the plunge in US technology stocks has exacerbated this trend.

In the foreign exchange market, Asian currencies generally appreciated against the U.S. dollar. However, there is still great uncertainty as to whether the strong dollar has peaked.

The US dollar index fell 0.1% in July, led by the yen, whose strength has spread to other Asian currencies. Robertson told reporters that in July, the Malaysian ringgit and the Thai baht rose sharply after the yen, and the renminbi, the Singapore dollar, the Indonesian rupiah and the Korean won all rebounded from their recent lows. On August 2, the offshore renminbi rose nearly 700 points against the US dollar, closing at 7.1657 on the same day.

At the same time, Standard Chartered believes that polls show that the gap between the two US presidential candidates Harris and Trump is narrowing, and the market has reduced the possibility of Trump's victory. "This should reduce the geopolitical term premium and ease the pressure on some countries' currencies, especially the Malaysian ringgit, Thai baht and Korean won, which are most vulnerable in this regard."

Robertson said the renminbi rebounded sharply, but not as much as some other Asian currencies. "We expect China to pay more attention to stabilizing economic growth and further cut interest rates, and the interest rate gap between China and the United States may remain."