Asian Stock Turmoil Amid US Recession Fears

• News
• 2024-07-21

Core Viewpoints

1. The significant adjustment of U.S. technology stocks and the sluggish U.S. economic data are the main triggers for the recent plunge in Asian stock markets. The U.S. economic data has been worse than expected, leading to market doubts about whether the Federal Reserve has missed the best timing for interest rate cuts, and expectations for the Federal Reserve to accelerate the pace of rate cuts have risen sharply.

2. The main reason for the appreciation of the Japanese yen is the misaligned monetary policy operations between the U.S. and Japan, coupled with geopolitical risks, which have triggered the unwinding of carry trades.

3. Asian markets are expected to gradually stabilize in the future, and it is too early to talk about a financial crisis. In the short term, the main risk factors still come from geopolitical uncertainties.

Events:

On August 5th, the Nikkei 225 index plummeted by 12.4%, marking the largest single-day drop since the 1987 Black Monday crash, and the yen appreciated by 2.8%. At the same time, South Korea's KOSDAQ index fell by 11.3%, Taiwan's weighted index fell by 8.4%, Singapore's FTSE Straits Times index fell by 4%, India's SENSEX index fell by 2.7%, and Asian markets in Southeast Asia and the Middle East all saw declines.

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Main Text

The significant adjustment of U.S. technology stocks and the sluggish U.S. economic data are the main triggers for the recent plunge in Asian stock markets. As the global recession trade prevails, financial markets' concerns about U.S. stocks and a U.S. economic recession suppress risk appetite. Previously, against the backdrop of the global supply chain and industrial chain restructuring, Asian assets represented by Japan and India have risen sharply, with their trends highly correlated with the rise of the U.S. technology sector. U.S. stock valuations have reached high levels, and with recent technology sector earnings falling short of expectations, market confidence in a new round of technological revolution has been shaken, and U.S. blue-chip stocks such as Intel have continued to decline. As a barometer for global stock markets, fluctuations in the U.S. market directly affect the emotions of global investors, especially for Asian markets, which often show a clear联动 effect at the opening of the next day. Part of the reason for the decline in the Japanese stock market can be attributed to the negative signals transmitted from the U.S. market.

At the same time, the U.S. economic data has been worse than expected, leading to market doubts about whether the Federal Reserve has missed the best timing for interest rate cuts, and expectations for the Federal Reserve to accelerate the pace of rate cuts have risen sharply. The weak employment data released by the U.S. on Friday, along with previous consumer confidence and manufacturing activity data, all indicate that an economic "soft landing" may face challenges. If the U.S. enters a recessionary period, the impact on external demand for Japan, South Korea, and Southeast Asia will be significant. The recent synchronized decline in U.S. stocks and Asian stocks is both a reaction to the uncertainty of Federal Reserve policy and a concern about the slowdown in the Asia-Pacific regional economy.

The appreciation of the yen and the decline of Japanese stocks have become the core of the turmoil in the current Asian market. The main reason for the appreciation of the yen is the misaligned monetary policy operations between the U.S. and Japan, which have triggered the unwinding of carry trades. Last week, the Federal Reserve kept the policy interest rate unchanged, while the Bank of Japan raised interest rates by 15 basis points, and with the significant narrowing of the U.S.-Japan interest rate differential, the signal that the yen's trend of depreciation has ended has been clarified, leading to a significant unwinding of speculative trades against the yen and the quantitative trading sales of risk parity funds. Speculative positions in the yen were reduced from 183,000 contracts at the beginning of the month to 70,000 contracts. Overall, the impact of the Federal Reserve is greater than that of the Bank of Japan. In addition, the seasonal factor of developed market hedge funds adjusting holiday positions is also a reason for the decline in yen short positions, exacerbating market turmoil.Geopolitical tensions have exacerbated global risk aversion. The recent assassinations of Hamas and Hezbollah leaders in Lebanon have worsened the situation in the Middle East, triggering geopolitical concerns and leading to a significant appreciation of safe-haven currencies such as the Japanese yen and the Swiss franc. The appreciation of the yen is a result, not a cause, of the rising risk aversion.

The decline in Japanese stocks is also related to foreign short-selling operations on Japanese equities. Data from the Tokyo Stock Exchange shows that in late July, short positions held by overseas investors in the Japanese stock market increased by 2 trillion yen, with the most significant rise in positions on the Nikkei 225 mini index futures. The recent surge in Japanese stocks has been accompanied by a trend of yen depreciation. The current trend of yen depreciation has undergone a fundamental reversal, which suppresses Japanese companies' exports and overseas profits.

Asian markets are expected to gradually stabilize, and it is premature to talk about a financial crisis. Firstly, the speed and magnitude of the U.S. recession are not yet certain, and the market may be overreacting. Secondly, central banks around the world are responding in a timely manner, and if the market continues to decline in the near term, they may introduce joint market rescue measures. Thirdly, the current decline is the result of multiple factors, and there are no significant signs of a downturn in the fundamentals of various countries. Asian stock market valuations have not reached historical highs, and there is also support from earnings. At the current policy level, the focus is on preventing the risks in the stock and foreign exchange markets from spreading to a broader financial market. In the short term, the main external risk factors still come from geopolitical uncertainties, and the current market oversold situation may mainly reflect concerns about the uncontrollable situation in the Middle East.

Risk Analysis:

1. U.S. economic data falls short of expectations, increasing the risk of a hard economic landing, leading to a general recession, rising unemployment, and weakening external demand.

2. Volatility in the U.S. and Asian financial markets spreads to a broader financial system, creating systemic financial risks, liquidity issues, and causing significant shocks to the market.

3. The economic fundamentals of Asian economies deteriorate, the situation of capital outflows intensifies, currency appreciation may lead to a rapid deterioration in trade conditions, and hinder the economic recovery process.

4. Global geopolitical tensions escalate again, rising risk aversion drives disorderly capital flows, causing new shocks to the financial stability of emerging markets, and potentially affecting the stability of the Chinese yuan exchange rate.