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global market volatility is coming again!

in the morning trading today, the nikkei 225 index fell by more than 3%, toyota motor and mitsubishi ufj financial fell by more than 4%. the south korean stock index kospi fell by more than 2%. subsequently, the declines of these stock indexes narrowed. it is worth mentioning that the egyptian stock index, which opened first yesterday, closed down more than 2.4%, and together with the saudi stock index, it recorded the largest single-day decline in nearly a month.

at the funding level, there are also constant negative news. goldman sachs recently said that global hedge funds sold stocks for the fifth consecutive month in august, the fastest since march 2022. at the same time, bank of america said that as of last wednesday (4th), investors injected $61 billion into cash money market funds in the past week to welcome the federal reserve's first interest rate cut in four years. this is completely contrary to market expectations.

so, what kind of logic is the global market playing out?

crash

in the morning trading today, the nikkei 225 index and the topix index opened lower by 1.6% and 1.7% respectively. the south korean stock market opened lower by 1.8%. shortly after the opening, the nikkei 225 index fell by 3%, and the south korean stock index fell by 2%. the australian stock index s&p/asx index fell by 1.2%. the msci asia pacific index fell by 1%. subsequently, the declines of major indexes narrowed, but they all ran at low levels.

it is worth mentioning that the middle east stock market, which opened first on sunday (september 8) beijing time, was also bleak. the saudi stock exchange all-share index closed down 0.97%, the largest single-day drop since august 5, at 11,982.30 points, approaching the closing level of 11,981.40 points on august 18. it fell below the 200-day moving average and the 100-day moving average, approaching the 50-day moving average (these three technical indicators are temporarily reported at 12,044.29 points, 12,011.77 points, and 11,965.58 points respectively). saudi aramco (aramco.ab) closed down 0.91%, falling for several consecutive days. the egyptian stock exchange egx 30 index closed down 2.44%, also the largest single-day drop since august 5, at 30,273.73 points.

so, what exactly caused the market to fall? analysts believe that the main reason is the expectation of a us interest rate cut. in august, non-farm employment increased by 142,000, which was lower than the market expectation of 160,000. there is no doubt that the federal reserve will cut interest rates in september. however, from a historical perspective, such preventive interest rate cuts in the united states are unlikely to drive the equity market up in the initial stage. michael hartnett, chief investment strategist at bank of america, said that the market is "selling the first rate cut" and risk assets have actively led the federal reserve and are no longer concerned about lower growth.

on the other hand, asian traders will assess the revised gdp data for the second quarter of japan released on monday. japan's gdp in the second quarter was 2.9% year-on-year, lower than the 3.2% expected by economists polled by reuters and the estimated 3.1%. after a sharp rise last friday, the yen also fell 0.2% to 142.55 against the dollar today, breaking away from the nine-month low hit last friday. in addition, as japan's real wages adjusted for inflation rose 0.4% year-on-year in july, nominal wages increased by 3.6%, an increase for 31 consecutive months. coupled with events such as the rice shortage in japan, japan's inflation expectations are rising rapidly. this also means that the need for the bank of japan to raise interest rates is increasing.

unexpected flow of funds

it is worth noting that previously, many investment fund managers hoped that the interest rate cut would reduce the returns of money market funds and put a lot of cash into stocks and bonds. however, global funds did not flow into the stock market because of the fed's interest rate cut, and risk aversion sentiment soared instead.

the latest data from bank of america shows that in the week ending last wednesday (4th), investors injected $61 billion into cash money market funds to welcome the federal reserve's first interest rate cut in four years. but counterintuitively, large investors tend to turn to money market funds because the range of short-term fixed-income assets they hold generally provides higher long-term returns than short-term treasury bills, and the yields of short-term treasury bills are highly sensitive to the federal reserve's interest rates.

bank of america cited epfr data in its weekly flow show report, pointing out that investors invested $60.8 billion in cash funds in the past week ending last wednesday, and the cumulative cash inflows in the past five weeks reached $231 billion, the largest amount since december 2023.

currently, u.s. interest rates are in the range of 5.25% to 5.5%, and the yield of money market funds has reached the highest level since before the financial crisis in 2008. according to data from the investment company association, the current size of u.s. money market funds has exceeded us$6.3 trillion, higher than the us$3.6 trillion at the beginning of the outbreak.

in addition, the latest data from goldman sachs shows that in early august, global stock markets collapsed due to concerns about a us recession and the unwinding of large-scale carry trades in the yen, and global investors turned to risk-averse mode. according to reports over the weekend, the bank said that the accelerated sell-off was mainly due to an increase in short selling of individual stocks and a moderate sell-off of long positions. the sell-off was mainly led by sectors such as technology, industrials and consumer discretionary goods. regionally, north america and japan led the decline, and japanese stocks suffered the worst sell-off since december 2018. however, the bank did not disclose the scale of the sell-off. on august 5, japan's nikkei index fell 13%, setting a record for the worst single-day sell-off since 1987, prompting bank of japan officials to reduce the possibility of a near-term interest rate hike.

from the perspective of the global macro situation, some pessimistic expectations have indeed emerged. according to the latest forecast of the united nations conference on trade and development, global economic growth will decline to 2.6% in 2024, just above the 2.5% threshold usually associated with economic recession. inflation is expected to continue to cool, although in many countries, price pressures will ease longer than they appear. the recent forecast of the oecd also shows that global economic growth will slow to 2.7% in 2024, the lowest annual growth rate since the global financial crisis.

analysts believe that judging from the current macroeconomic situation, it will not be easy to quickly get out of a recession once it occurs. the recession will pose a severe challenge to governments, who must choose between high inflation and a strong economy.