A wave of intense sell-offs has swept across global financial markets in recent days, leaving investors and experts confused. In just three weeks, about $6,400 billion was wiped out from global stock market capitalization.
In Tokyo, the Nikkei index fell 12.4% - the sharpest decline since 1987. In Seoul, the Kospi dropped 9%. When the US market opened, the Nasdaq index plunged 6% in just a few seconds. At the same time, virtual currencies plummeted and the VIX volatility index skyrocketed.
"This is an incredible exodus and knives are falling everywhere," said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.
A market panic like this creates different risks. The most prominent among them is the wave of sell-offs, which, if not controlled long enough, can clog the gears of the financial system, slow down lending activities and become the "overflowing drop" that pushes the economy down. The global economy is entering a recession that many people are currently worried about.
Where does the cause come from?
Behind the wave of sell-off in the past few days is the shaking of three main pillars that investors have placed their trust in for many years: Faith in the inviolable strength of the US economy; expectations of a rapid revolution brought about by artificial intelligence; and assume that Japan will not raise interest rates significantly.
However, recent events have undermined each of these assumptions. The July jobs report in the US was weak, the business results of major technology companies missed expectations, and the Bank of Japan (BoJ) raised interest rates for the second time this year.
This has made investors suddenly realize the potential risks in their investment strategies, from driving up technology stock prices to complex carry trades. .
Ed Yardeni, veteran economic expert, compared the current situation with the Black Monday event of 1987 (Black Monday) - the Dow Jones index fell 23% in 1 day. The event is scary but ultimately not a sign of economic collapse, according to Mr. Yardeni.
“The above event took place when investors thought the economy was or was about to fall into recession. But that's not happening at all," Yardeni, who runs Yardeni Research, said on Bloomberg TV. "It really has more to do with the internals of the market. I think something similar is happening here.”
On Wall Street, many economists are calling on the US Federal Reserve (Fed) to cut interest rates urgently, even before the September meeting. However, some experts warn that such a move could weaken confidence in the economy.
Unrest accumulates
In fact, the factors that triggered the chaos of August 5 had been quietly accumulating for weeks.
It all started in early July, when technology stocks had just hit their peak, the yen suddenly increased in price. Investors, with their sharp intuition, quickly recognized this as a sign that the Bank of Japan (BoJ) was about to raise interest rates. This causes traders to rush to exit transactions related to interest rate differences (carry trade), creating a wave of pressure that spreads throughout the global market.
Next, a series of financial reports from technology giants such as Amazon and Intel raised new concerns. The numbers show that despite pouring billions of dollars into artificial intelligence (AI), these companies have still not earned adequate profits. As a result, their stocks plummeted.
Meanwhile, the bond market also continuously sends alarming signals. Economic data shows some sectors are starting to cool. On July 31, when the US Federal Reserve (Fed) decided to keep interest rates at the highest level in more than two decades, and the BoJ also tightened policy, the bond market reacted strongly. Then on August 2, the jobs report showed the unemployment rate rising and job growth slowing.
Across Wall Street, economists are starting to predict that the Fed will need to intervene with a 0.5 percentage point cut or take emergency action.
Witnessing this development, trader Shoki Omori arrived at Mizuho Securities' office at 6 a.m. on Monday (August 5), ready for big fluctuations in the market. But even he was surprised by the scale of the sell-off.
As the yen soared 3%, the Nikkei index plunged throughout the trading session. By the end of the day, the index had evaporated more than 4,500 points, the sharpest decline since 1987.
"This far exceeded my forecast," said Omori, chief trading desk strategist in Tokyo.
When this financial storm will end is still a mystery. But one thing is certain: as Shoki Omori reminds us, we need to "prepare for more uncertainty".
(Bloomberg)
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