Premature US Recession Fears; Japan Market Warns of 'New Volatility'

• News
• 2024-11-01

The resurgence of concerns over the United States economy falling into a recession has triggered a series of chain reactions in the capital market, resulting in an "Ash Monday" in the Asian market.

Recent data disclosed by the U.S. Department of Labor shows that the U.S. unemployment rate unexpectedly rose to 4.3%. The weak employment report has intensified investors' concerns about further economic slowdown, and the global stock market has entered a panic mode of plummeting.

In terms of the Asia-Pacific market, on August 5, the Nikkei index and the South Korean Composite Index triggered a circuit breaker. Among them, the Nikkei 225 index once plummeted by more than 13%, falling by more than 4,700 points in a single day. After the South Korean GEM index plummeted by 8%, it triggered the circuit breaker mechanism, and trading was once suspended for 20 minutes.

Mark Haefele, Global Chief Investment Director of UBS, recently stated, "We believe that concerns about the U.S. economy falling into a recession are premature." He mentioned that the U.S. employment data in July did not meet the market expectations, but "it is unwise to overinterpret a single data."

The reason given by Mark Haefele is that the recent weak performance of U.S. labor data may be influenced by the hurricane season's impact on the job market. "We believe that the U.S. economy is heading for a soft landing, not a contraction," he said.

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Regarding the recent weak performance of the Japanese stock market, UBS said in the latest research report released on August 5 that currently, investors have to deal with multiple new concerns, including the unexpected tightening of policy by the Bank of Japan, the sharp decline in the U.S. dollar against the yen may damage the profits of Japanese exporters, and the U.S. economy falling into a recession.

UBS expects that under the condition that the U.S. dollar against the yen exchange rate is far below the 150 mark, it may take longer for investor sentiment to recover.

Safe-haven sentiment puts pressure on the market

Last Friday (August 2), U.S. stocks and bond yields both fell, and the weak employment data raised investors' doubts about the Federal Reserve's late interest rate cuts and the possibility of the U.S. economy falling into a recession.

The U.S. employment report for July showed that non-farm employment increased by only 114,000, and the unemployment rate rose from 4.1% in the previous month to 4.3%, a significant rebound from the recent low of 3.4% in May."Although the unemployment rate is still relatively low by historical standards, such a rapid increase in the past has often meant a sudden slowdown in economic growth," Mark Heifel stated.

However, he also believes that "over-interpreting single data is not a good strategy." The impact of hurricanes in the United States may have exaggerated the weakness of the employment situation in July, and the employment report for the next month is expected to provide more clues.

Mark Heifel also mentioned that the U.S. employment report data disappointed the market and will intensify concerns about maintaining high interest rates for too long.

"Given recent evidence that inflation is continuing to fall back to the Federal Reserve's target, we believe the Federal Reserve has the motivation and reason to cut interest rates faster than previously expected," he mentioned.

There is a market view that the Federal Reserve will start cutting interest rates from September, with the window for rate cuts approaching and market volatility increasing.

UBS estimates that the Federal Reserve will cut interest rates by 100 basis points this year, most likely starting with a 50 basis point cut in September, so that the U.S. economy can avoid recession and the growth rate remains close to the 2% trend rate.

Regarding the trend of the U.S. stock market, Mark Heifel believes that the U.S. stock market may continue to fluctuate in the short term, but the risk-reward has improved after the recent pullback, especially in the technology sector.

"If investors' concerns about a slowdown in U.S. economic growth and the Federal Reserve lagging behind the interest rate curve continue to intensify, and the development of artificial intelligence falls short of expectations, then the market may still have room to fall," he said.

"But similar to the situation last fall, when concerns about economic overheating and further tightening of policy by the Federal Reserve led to a 10% drop in the S&P 500, we believe the current market's worries about growth are also somewhat excessive," he also mentioned.

Emotional repair will take longer.The massive shock in the overseas market has been transmitted to the Asia-Pacific market.

Affected by multiple factors such as the U.S. economic outlook not meeting expectations, the Federal Reserve's late interest rate cut, and the Bank of Japan's interest rate hike, on August 5, the Tokyo stock market continued the downturn from last week and continued to plummet, with the Nikkei 225 index falling by more than 13% at one point, and the Japanese Topix index triggering the circuit breaker mechanism.

"The Japanese stock market has led the global stock market decline in the past few days, and these declines have occurred against the backdrop of the yen's significant rebound due to the Bank of Japan's interest rate hike," UBS said in a research report released on August 5. At present, investors have to deal with multiple new concerns, including the Bank of Japan's unexpected tightening of policy, the possibility that a significant decline in the dollar-yen exchange rate may harm the profits of Japanese exporters, and the U.S. economy falling into a recession.

Recently, the Bank of Japan "unexpectedly" raised interest rates to 0.25%, and the yen's exchange rate against the dollar soared, breaking through 150.

UBS analyzed that, as long as the dollar-yen exchange rate remains at or above 150, Japan's stock market may rebound in the short term; if the dollar-yen exchange rate is far below 150, it may take longer to restore investor sentiment.

UBS also said that if the dollar-yen exchange rate remains between 145-150, the pressure on Japan's general earnings forecasts may continue.

"In the short term, we believe that the current Topix level is equivalent to the dollar-yen exchange rate being below 150, but short-term market fluctuations should continue until the dollar-yen exchange rate stabilizes," UBS believes that "recovery may occur after Japanese companies announce their earnings for the first half of the year in October, or even after the U.S. presidential election in November."

In this context, how should investors deal with the fluctuations in the Japanese stock market?

Taking the investment portfolio of Japanese investors as an example, UBS analyzed that the upcoming interest rate cut cycle of the Federal Reserve, the continuous review of the development of artificial intelligence, and the rise of political uncertainty before the U.S. presidential election in November all mean that Japanese investors should be prepared for new fluctuations, but should avoid overreacting to short-term market changes.

Against this backdrop, UBS suggests that investors should focus on investing in companies with strong competitive advantages and sustained growth, while seizing the opportunities of artificial intelligence. Long-term investors can consider investing in hedge funds and private equity to find new sources of returns and potentially reduce the fluctuations in portfolio value.