Nikkei Plunges 10,000 Points Amid Fed's Potential "Hard Landing

• News
• 2024-11-10

At the same time, the Bank of Japan unexpectedly raised interest rates, announcing a 15BP increase on July 31st, and gradually reducing the specific plan for purchasing Japanese government bonds, aiming to reduce the monthly bond purchase volume to 3 trillion yen by March 2026. On one side is the surging yen, while on the other side is the plummeting US dollar and the plummeting US assets, thus initiating a major unwinding of carry trades.

Let's do some calculations. Previously, traders tended to finance with low-interest-rate yen and invest in high-interest-rate markets, such as buying US assets, to earn both the appreciation of the US dollar and the appreciation of assets. Before, the interest rate difference between the US and Japan was close to 5%, and the yen exchange rate depreciated by more than 10% within the year. Now, the interest rate income may have been reduced to 3%, but the exchange rate has directly lost 14% (due to the surge in the yen), and at the same time, the invested US assets have plummeted, for example, Nvidia has fallen by more than 15% in the past month. This major reversal has led to the reversal of carry trades, and even some hedge funds have been wiped out. This reversal has also directly led to the repatriation of funds to Japan, continuing to drive the appreciation of the yen.

Thus, the "nightmare" for the Japanese stock market began. Jia Wenjian, the head of multi-asset investment and management at Pictet Asia, previously said to reporters: "The Japanese stock market performed well before because the Bank of Japan maintained monetary easing, which led to the continuous depreciation of the yen, greatly boosting the competitiveness of Japanese exports. At the same time, it also had a good promotion for Japan's tourism and service industries." However, he also believes that if the yen turns to appreciate, it will be difficult for the Japanese stock market to continue to rise sharply.

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Nomura Securities also mentioned to reporters before that the institution reviewed the history of the past 50 years, with 27 years of the yen being on the rise. During this period, the proportion of the Nikkei's rise and fall was 15:12, that is, the Nikkei was more likely to rise during the period of yen appreciation. However, traders also believe that the exception lies in that once the yen appreciates rapidly, the impact on the Japanese stock market may be catastrophic.

Peripheral fluctuations will continue

In the short term, fluctuations will continue. In addition to the worrying Japanese market, the US market is also highly uncertain.

"The central bank super week has come to an end, but the turbulent market may not end soon, and the 'recession trade' may replace the 'interest rate cut trade' as the main logic of the market. This week, focus on China-US economic data and the interest rate decision of the Reserve Bank of Australia," Jerry Chen, a senior analyst at Gain Capital Group, said to reporters.

The US non-farm payrolls in July only increased by 114,000 (the second lowest this year), and the previous value was revised down to 175,000. The unemployment rate unexpectedly rose from 4.1% to 4.3% (the highest level since October 2021), and the year-on-year growth rate of hourly wages fell to 3.6%. All data were worse than expected. This data triggered the "Sahm Rule" with a 100% accurate prediction rate for predicting recessions, and a "recession trade" is brewing. Goldman Sachs believes that if subsequent employment data continue to be worse than expected, the Federal Reserve may urgently cut interest rates by 50BP in September.

"The rapid cooling of the job market, coupled with the poor performance of other economic data last week, has made the market increasingly worried about the possibility of a US economic recession and the possibility of the Federal Reserve making a wrong decision (maintaining high interest rates for too long). Panic has spread rapidly in the market. Therefore, under the condition that the Federal Reserve has given the green light for interest rate cuts in September last week, the interest rate market has even bet that there may be a direct interest rate cut of 50BP in September, and the number of expected interest rate cuts for the year has increased from 2 to 4 times," Jerry Chen said.

On August 5th, some market participants also expected the Federal Reserve to urgently cut interest rates. The money market showed that traders expected a 25 basis point interest rate cut by the Federal Reserve within a week with a probability of 60%.Recently, poor financial reports and guidance from tech giants have accelerated the sell-off of U.S. stocks, especially tech stocks (Intel plummeted by 26% last Friday). Both the Nasdaq and the S&P 500 have fallen for four consecutive weeks from their historical highs, with the former down 10%, entering a technical correction phase. The VIX index jumped to 23% and once soared close to 30%, setting a 15-month high. European and Asia-Pacific stock indices were all defeated last week.

The latest news over the weekend showed that Buffett's Berkshire Hathaway reduced its Apple shares by nearly 50% in the second quarter (a 13% reduction in the first quarter), and its second-largest holding, Bank of America, was also sold, with the company having a net sell-off of stocks for seven consecutive quarters. Analysts believe that so far, Apple has not been significantly affected by the heavy hit of tech stocks. Its market value of $3.3 trillion ranks first in U.S. stocks, but Buffett's actions are hard not to make the market think in a more pessimistic direction.

The yuan exchange rate rebounded, and the stock market bottomed out.

In this round of fluctuations, the yuan has greatly benefited.

As of 15:10 on August 5, Beijing time, the U.S. dollar/yuan was reported at 7.1442, and the U.S. dollar/ offshore yuan was reported at 7.1357, which had once fallen below 7.3 earlier this year.

"The liquidation of the yen carry trade has driven the yen to soar, and the maximum increase of the yen against the U.S. dollar has approached 14%, which has driven the yuan, which is also a low-interest currency. More importantly, the U.S. dollar index has broken, and foreign trade merchants have started to be impatient in these two weeks, starting to exchange (converting U.S. dollar income into yuan), which may also intensify this increase." A foreign exchange trader at a foreign bank told reporters. The market expects that the relative strength of the yuan will not be reversed in the short term.

However, China's stock market is also affected by external sentiment. On August 5, the Shanghai Composite Index closed down 1.54%, at 2,860.7 points; the Hong Kong stock market closed, with the Hang Seng Index down 1.46%, and the Hang Seng Technology Index down 1.36%. Goldman Sachs mentioned in a research report that historically, Asian stock markets usually perform positively after the first interest rate cut by the Federal Reserve, but perform poorly in a recessionary environment.

Liu, deputy general manager and investment director of AllianceBernstein, said to reporters a few days ago that the current sentiment is relatively low, but historically, the probability of winning investments in the A-share market at a low valuation level is high. According to the MSCI China A-Share Index, the current price-to-book ratio of the A-share market is 1.55 times. Since 2008, when the A-share price-to-book ratio falls to 1.4-1.6 times, the average cumulative return over the next two years can reach 52%.

After more than three years of decline, A-shares are at a historical bottom. Wu Zhaoyin, director of macro strategy at AVIC Trust, told reporters that regulators have responded to market calls in a timely manner and taken various measures (reducing stamp duty, suspending IPOs, adjusting financing的节奏, encouraging listed companies to pay dividends, encouraging long-term funds to enter the market, improving the delisting system, and regulating quantitative trading, etc.) to stabilize the stock market. Overall, the outflow of funds from the stock market is decreasing. In addition, both interest-bearing bonds and credit bonds have reached historical lows since the 2008 financial crisis, with obvious bottom characteristics.