After mid-to-late July, investors across global markets suddenly discovered that the current situation of major asset classes was quite different from that in earlier this year. The assumptions that had driven the global financial markets this year suddenly faced the risk of being overturned one by one...

Let's take a closer look at the topics that have been hyped in the market in the first half of this year...

US stocks, especially technology giants, Japanese stocks, precious metals and other industrial metals such as copper, the US dollar...

However, these major assets, which have risen sharply in different fields and industries this year, have all encountered setbacks in at least the past two weeks.

This has made it incredibly difficult to predict the next trend of the market!

"Investors were previously quite risky in their positions, their attitudes towards the market had become quite positive, and valuations were constantly rising, so it's difficult to judge whether the market will continue to adjust." said Toby Gibb, the head of investment solutions at Artemis in London.

Obviously, these sudden market swings have caused the volatility indices of the stock market (VIX), bond market (MOVE), and currency market to jump rapidly in recent times. May several factors of both bullish and bearish influence in the bond and forex markets have triggered a frenzy of capital reallocation in recent weeks as investors bet the Federal Reserve will quickly cut interest rates. Another reason is the weak consumer spending, which is also reflected in disappointing corporate earnings.

Behind the sudden series of repositioning in the market, the current news seems to be equally unpredictable as the impact of different positive and negative factors become intertwined in a very short time...

In the bond and foreign exchange markets, as doubts about the economic outlook deepen, investors are rushing to reconfigure their funds in the last few weeks, predicting that the Fed will further reduce interest rates earlier and more sharply. Another reason prompting them to do so is the weak consumer spending, which is also reflected in disappointing corporate earnings.

At the same time, shareholders suddenly began to doubt the large-scale investment of technology giants in artificial intelligence and whether they could get a quick return. As a result, they sold crazily, which pushed Nvidia and other representatives of the first half of this year's stock market winners into bearish territory. The dramatic evolution of the US presidential election in which Trump was attacked and Biden withdrew has also made many investors indecisive.

Copper and other industrial metals have also reversed their recent uptrend, and are declining due to the slowdown in growth rates of many global economies, as well as concerns about the prospects of the technology industry. Even the GDP report for the second quarter of the US economy released on Thursday showing stronger-than-expected economic growth has not eased investors' concerns about future prospects.

"It seems that the popular trades whose valuations have reached "stupid levels" have indeed began to be closed out." Louis-Vincent Gave, CEO of Gavekal Research, wrote in a report to clients.

Torsten Slok, Chief Economist of Apollo Global Management, told clients on Thursday that if the economy began to slow down, the speed of the slowdown would be crucial. If the slowdown is too fast, it will have a negative impact on corporate profits and increase the likelihood of a decline in the stock market and credit market.

Here are some of the most noteworthy market trends and logic evolution nowadays:

Global Stock Markets

US and European stock markets have been predicting that as inflation is suppressed, the Fed will be able to ease monetary policy later this year to avoid economic recession. By mid-May, the Stoxx Europe 600 Index hit a historic new high, giving investors a 12% return since 2024. Led by tech stocks, the S&P 500 Index also hit its 38th new high of the year on July 16.

However, many investors are now worried that the Fed may have missed its chance to act due to the slowing of both inflation and employment and the start of rapid sliding in economic conditions.

So far, nearly a third of the companies in the S&P 500 Index have released second-quarter results, and as the slowdown in economic growth becomes more apparent, sales data is receiving more and more attention. According to data compiled in the industry, only 43% of companies have exceeded revenue expectations so far, the lowest level in five years.

And the previous over-enthusiasm for AI doesn't seem to be all good. This week, investors were surprised by Alphabet, Google's parent company's massive investment in artificial intelligence, but the contribution to revenue has yet to be demonstrated. On Wednesday, the seven giants of the US stock market also experienced their biggest single-day drop since the ChatGPT came into being.

In fact, for most of the year, many industry insiders have criticized the "polarization" of the stock market created by the Wall Street AI frenzy, with super large-cap stocks driving the S&P 500 index to repeatedly hit new highs, while other stocks mostly plummeted.

Currently, the Nasdaq 100 index has fallen more than 8% from its record high on July 10, evaporating 2.3 trillion U.S. dollars in market cap. Although the index is still up by about 13% this year, risks are clearly accumulating. According to a fund manager survey by Bank of America this month, going long on the seven technology giants has become the most crowded trade in the growth stock sector since October 2020.

James Athey, portfolio manager at Marlborough Group, said that the valuation of large technology stocks is simply not reasonable unless the boldest predictions are made about future growth, profitability, and monetary policy, and that it is inevitable that such extreme situations will not continue.

Bond Market

In the bond market, the gloomy economic growth prospects around the world have increased people's bets on lower interest rates in the near future. Investors have rushed to buy short-term bonds because they are concerned that monetary policy may be too tight and they want to take action before interest rates are lowered.

On Thursday, the 2-year US Treasury yield was briefly 12 basis points higher than the 10-year US Treasury yield, marking the latest occasion when the yield curve inversion has ended since July 2022 - remember that more than a month ago, the above-mentioned spread was over 50 basis points.

Although the likelihood of a rate cut by the Fed at next week's meeting seems very slim, the market has largely priced in the expectation of a rate cut in September. Traders expect the rate cut to be about 30 basis points in September, implying a 20% chance of a 50 basis point cut by then. The expected rate cut by end-2024 will be more than 70 basis points, 7 basis points higher than on Wednesday.

In the forex market, the reassessment of interest rate differentials and the safe-haven bid triggered by geopolitical uncertainty have boosted the yen to a frenzy. In the past two years, the yen has been one of the biggest victims of the Fed's tight monetary policy. But recently, the yen has rebounded about 6% from the low it touched earlier this month, the biggest gain among G10 currencies.

As investors reassess their leveraged bets, the stunning rally in the yen has even triggered a series of market shakes around the world. The strong yen is a disadvantage for Japanese exporters, so the big rise in the yen in recent days has pushed the Nikkei 225 index into a technical correction zone of 10%.

At the same time, a series of leveraged trades in interest differentials and liquidation has also helped push the yuan to its highest level in over a month, while hitting high-interest currencies such as the Australian dollar, as carry trades fall out of favor. Kyle Rodda, senior market analyst at Capital.Com, said, "This is actually a large-scale deleveraging event triggered by yen shorts. This has forced widespread liquidation across the market."

Calvin Yeoh, a fund manager at Blue Edge Advisors, also pointed out that "summer liquidity is usually low, and if the yen doesn't just fall, liquidation will lead to cross-asset clearing. This will cause volatility to rise and force selling to control oversized risk exposures in volatility hedge funds."

Metal Market

The growing pessimism about demand and the technology sector has even affected the metal market.

LME copper fell below $9,000 a tonne for the first time since early April this week, down about a fifth from the record high set in mid-May. Investors, who had previously bought into the market out of concerns about supply tightening and increased use of copper in data centers and other areas, are now worried about rising inventories and a weak spot market in China.

At the same time, gold prices fell to their lowest level in more than two weeks on Thursday as profit taking emerged after a recent rebound. "There is certainly some profit taking, caused by the weakness in the U.S. stock market, which is not just selling in a single market," said Marex analyst Edward Meir.

Fawad Razaqzada, a market analyst at City Index and Forex.com, believes that the current most influential factor on the price of gold is the "sudden fall" of various risky assets, because gold has been rising steadily in recent years, and if risky assets suddenly plummet, investors may want to cash out of the gold market to raise funds.

Regarding the current situation in the cross-asset area, macro strategist Cameron Crise said, "In the eternal struggle between fear and greed, fear now has the upper hand, and a large number of consensus positions have suffered losses this week. All of this represents these trades collectively falling into painful abysses, one of which is a cyclical event, and as investment risk exposure decreases across the board, position is almost the only important fundamental."

Editor: Eason