Asian stock markets turmoil amid US recession
2024-08-07
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(The authors of this article are Huang Wentao, Chief Economist of CITIC Construction Investment Securities; Qian Wei, Chief Analyst of Overseas and Major Assets of CITIC Construction Investment Securities; Liu Tianyu, Analyst of the Chief Economist Team of CITIC Construction Investment Securities)
Core Viewpoint
1. The sharp adjustment of US technology stocks and the sluggish US economic data are the main triggers for the sharp drop in Asian stock markets. The US economic data fell more than expected, causing the market to question whether the Fed has missed the best time to cut interest rates, and expectations for the Fed to accelerate the pace of interest rate cuts have risen sharply.
2. The main reason for the appreciation of the yen is that the misaligned monetary policy operations of the United States and Japan, coupled with geopolitical risks, have triggered the unwinding of carry trades.
3. The Asian market is expected to stabilize gradually in the future, and it is too early to talk about a financial crisis. In the short term, the main risk factor still comes from geopolitical uncertainty.
event:
On August 5, the Nikkei 225 Index plunged 12.4%, the largest single-day drop since the Black Monday crash in 1987, and the yen rose 2.8%. At the same time, South Korea's KOSDAQ Index fell 11.3%, Taiwan's weighted index fell 8.4%, Singapore's FTSE Straits Index fell 4%, India's SENSEX index fell 2.7%, and Asian markets such as Southeast Asia and the Middle East all fell.
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The sharp adjustment of US technology stocks and the sluggish US economic data are the main triggers for the recent plunge in Asian stock markets.As global recession trading prevails, financial markets' concerns about the US stock market and the US economic recession suppress risk appetite. Previously, against the backdrop of global supply chain and industrial chain restructuring, Asian assets represented by Japan and India rose sharply, and their trend was highly correlated with the rise of the US technology sector. US stock valuations have reached high levels. As recent technology sector earnings reports have fallen short of expectations, the market's confidence in a new round of technological revolution has been shaken, and large-cap US stocks such as Intel have continued to fall. As a bellwether of the global stock market, the volatility of the US market directly affects the sentiment of global investors, especially for the Asian market, which often shows a clear linkage effect as soon as it opens the next day. The decline in the Japanese stock market can be partly attributed to the negative signals sent by the US market.
At the same time, the US economic data fell more than expected, causing the market to question whether the Fed had missed the best time to cut interest rates, and expectations for the Fed to accelerate the pace of rate cuts rose sharply.. The weak employment data released by the United States on Friday, and the previous consumer confidence index and manufacturing activity data also performed poorly, indicating that the "soft landing" of the economy may face challenges. If the United States enters a recession, it will have a significant impact on external demand in Japan, South Korea and Southeast Asia. The resonance decline of US and Asian stock markets this time is a response to the uncertainty of the Federal Reserve's policy and concerns about the slowdown of the Asia-Pacific region.
The appreciation of the yen and the decline of Japanese stocks have become the core of this round of turmoil in the Asian market. The main reason for the appreciation of the yen is that the misaligned monetary policy operations of the United States and Japan have triggered the liquidation of carry trades.Last week, the Fed kept the policy rate unchanged, while the Bank of Japan raised the rate by 15bp. With the sharp narrowing of the US-Japan interest rate differential, the signal of the end of the trend of yen depreciation was clear, resulting in a large-scale liquidation of speculative short positions of yen and the overlap of quantitative trading sell-offs of risk parity funds. The speculative positions of yen were reduced from 183,000 lots at the beginning of the month to 70,000 lots. In general, the impact of the Fed is greater than that of the Bank of Japan. In addition, the seasonal factors of the holiday position adjustment of hedge funds in developed markets are also the reason for the decline in yen short positions, exacerbating market turmoil.
The geopolitical situation has fueled global risk aversion. The assassinations of Hamas and Hezbollah leaders in Lebanon and the worsening of the situation in the Middle East have triggered geopolitical concerns, and safe-haven currencies such as the Japanese yen and Swiss franc have appreciated significantly. The appreciation of the Japanese yen is the result of rising risk aversion rather than the cause.
The decline of Japanese stocks is also related to the short position of foreign investors in Japanese stocks. According to data from the Tokyo Stock Exchange, in late July, overseas investors' short positions in Japanese stocks increased by 2 trillion yen, among which the position increase of Nikkei 225mini index futures was the most obvious. This round of Japanese stock market surge has always been accompanied by the trend of yen depreciation. The current trend of yen depreciation has fundamentally reversed, suppressing the exports and overseas profits of Japanese companies.
The Asian market is expected to stabilize gradually in the future, and it is too early to talk about a financial crisis.First, the speed and magnitude of the US recession have not yet been determined, and the market may overreact. Second, central banks of various countries are responding in a timely manner. If the market continues to fall in the near future, joint rescue measures may be introduced. Third, this round of decline is the result of multiple factors. The fundamentals of various countries have not yet shown signs of a sharp decline. The valuation of Asian stock markets has not yet reached a historical high, and there is also support from the perspective of earnings. At the current policy level, the focus is on preventing the transmission of stock and foreign exchange market risks to a wider range of financial markets. In the short term, the main external risk factors still come from geopolitical uncertainties. The current oversold market may mainly reflect concerns about the uncontrollable situation in the Middle East.
Risk Analysis
First, the US economic data is lower than expected, the risk of a hard landing is rising, and the economy is entering a recession as a whole. The unemployment rate is rising, which has led to weaker external demand. Second, the volatility of the US and Asian financial markets is transmitted to the wider financial system, forming systemic financial risks, causing liquidity problems, and causing a major impact on the market. Third, the economic fundamentals of Asian economies have deteriorated, capital outflows have intensified, and exchange rate appreciation may lead to a rapid deterioration in trade conditions, hindering the economic recovery process. Fourth, the global geopolitical situation has become tense again, and the rising risk aversion has driven disorderly capital flows, causing new shocks to the financial stability of emerging markets and may affect the stability of the RMB exchange rate.
(This article only represents the author's personal views)
