On July 26th, Caixin reported (Editor: Xiaoxiang) an article titled "Why did all the hot topics that exploded within the year crash? A sudden 180-degree reversal in the global market?" We have introduced the consecutive drop of hot market topics in the past two weeks.

For many cross-asset investors, the most impressive changes in the trends of various asset classes in the past half-month are undoubtedly two of them:

One is the crash of technology stocks represented by the "Seven Giants";

The other is the sudden rise of the yen, which has led the G10 currencies for a long time this year.

These two have been hot topics among investment bank experts and traders. In many market analysis comments and reports, the reasons for the volatility in these two areas are almost explained separately.

However, although these two seem to be unrelated, do you believe that there is some hidden correlation between them?

In fact, one interesting phenomenon is that both of these types of volatility originated on the same day: July 11th.

Investors who often follow our articles may still remember that we mentioned this day last week when we introduced the rotation of US stocks. Jim Reid, global economic and thematic research director at Deutsche Bank, described it as an 'intriguing day' in a recent report...

As shown in the following figure, whether it is the Nasdaq or the US dollar against the yen, this day is actually the turning point for their respective trends.

Since that day, the overall market capitalization of the “Seven Giants” has evaporated nearly one Amazon, and the US dollar against the yen has plummeted nearly 800 points.

If this trend continues, then when people review this year’s market trend at the end of the year, July 11th may be the 'most important day of the year.'

What happened on July 11th?

So what happened on that day?

The main theme that can connect all events that day was the weak US CPI announced that day. If we take the latest 'dove' analysis of Fed's No. 3 person, Dudley, on interest rate cuts as a signal, then nearly half a month ago, this unexpected low inflation reading had ignited people’s expectations of a rate cut in September, and some even speculated that the Fed might act as early as next week.

Of course, we have encountered situations where economic data has triggered expected interest rate cuts before, but investors obviously believe this time the story is not 'crying wolf.'

This has led to the most extreme imbalance in today's currency markets-the interest rate imbalance between the US dollar and the yen (the Fed is still at its highest level in decades, while the yen is still crawling near zero interest rates)-has undergone a major reversal.

Since July 11, the exchange rate of the US dollar against the yen has fallen more than 5%, breaking the long-term strong upward trend that allowed speculative investors to make profits easily. Even the Japanese authorities seem to have taken advantage of this momentum and conducted two rounds of suspected interventions on July 11th and 12th.

At the same time, the weakness of inflation data has also stimulated the rotation trend of US stocks: small-cap stocks have begun a period of promising performance, and large-cap stocks began to bear selling pressure.

Compared with large-cap stocks, especially the super large-cap stocks represented by the 'Seven Giants,' small-cap stocks in the United States are often more likely to benefit from a low-interest-rate environment. In addition to the remarks of US presidential candidate Trump, which have weighed on chip stocks and other AI concept stocks, the most rapid rotation in US stocks in decades has also occurred.

Is there a connection behind the stock and foreign exchange market?

In mid-July, the initial market triggers for the two aforementioned market categories were different. But do you really think there is no correlation between the two?

In fact, both betting against the Japanese yen and betting on technology stocks were very popular among hedge funds for a period of time. And for any investor, when one strategy goes bad, other strategies will also face the pressure to exit, which can easily self-reinforce.

The Swiss franc, seemingly low-profile in the forex market, once had a typical example. In 2015, when the Swiss National Bank abandoned its efforts to depress the Swiss franc exchange rate (cancelling the cap on the Swiss franc/euro exchange rate), the Swiss franc soared. Sadly, many hedge funds did not foresee this. Hedge fund group Man recalled in a report this week that when their bets on the Swiss franc went awry, they had to give up other bets. For example, a stock index bet that was a favorite of a hedge fund dropped 5% in the next few days.

Today, the speed at which the yen appreciates may be far less than the speed at which the Swiss franc appreciated a decade ago. But even so, the connection between the yen and technology stocks now appears more than just a coincidence. Not to mention that the two are themselves "naturally antagonistic" - technology stocks are the representative of risk asset allocation, while the yen is always regarded as a safe haven currency.

In fact, in the forex market, the low-yielding yen is often used as a financing currency by people to exchange high-yielding currencies such as the US dollar, Australian dollar, and Mexican peso, in order to seek interest rate differentials. Some people will even further invest it in some high-risk allocations. The current strength of the yen is undoubtedly likely to bring additional volatility to global assets, especially when these assets have already been in turmoil due to the weakening enthusiasm for artificial intelligence from the outside.

ING strategist Chris Turner and his team wrote in a report on Thursday: "The yen bears' closing out undoubtedly contributed to the global risk-off environment." They added: "There is certainly more closing to come and upcoming data/events may pose further downside risks for USD/JPY."

Blue Edge Advisors fund manager Calvin Yeoh also pointed out that "summer liquidity is usually low. If the decline in the US dollar against the yen continues, the closing position will cause cross-asset clearing. This will cause volatility to rise and drive funds to sell too much risk exposure in their hands through volatility."

Even heavy "speculators" do not necessarily have to bear all the responsibility for this - the causal relationship may be bidirectional. A hedge fund manager pointed out that some Japanese investors may have given up their bets on US technology stocks and exchanged dollars back into yen, which seems to be a reason for exacerbating the correlation between the two.

It is obvious that the two most popular speculative bets in the stock and foreign exchange markets are synchronously plummeting, and such a situation will naturally affect some "onlookers". If you are confused about the recent trends of the renminbi, gold, etc., you can also find answers from them.

Finally, an interesting topic to propose: If July 11 (the day when US CPI was released) is the ultimate day for this round of cross-asset variations, will the upcoming inflation release day (June PCE price index is about to be released tonight) cause new waves in the market?

Of course, considering the lag of the PCE data release date, if the data do not differ greatly from market expectations, according to past rules, the volatility of the market is unlikely to match that of the CPI release day. However, before the data is finally released, who can really say for sure...