The recession panic continues to spread, coupled with the sudden change in the Middle East situation, and on Monday global stock markets crashed. The Nikkei index in Japan closed down 12% and triggered multiple circuit breakers, Taiwan's stock market fell 8.4%, setting a record low, and the KOSPI index in South Korea fell 8.8%, the largest since 2008. The Nasdaq 100 Index futures fell more than 5%, and European stocks fell by 3%. The Renminbi has risen, and the yen has hit a seven-month high.

Amidst turmoil in global markets, Wall Street analysts generally believe the Federal Reserve will cut interest rates but only to a limited extent, and are bullish about opportunities in the bond market. Analysts warn investors to remain cautious about technology stocks, and to be alert to changes in market sentiment and exchange rate fluctuations. There may be even more intense market volatility before the U.S. presidential election.

Daniel Tan, Portfolio Manager of Grasshopper Asset Management Company, said:

We believe it is unlikely that the Federal Reserve will cut interest rates five times by the end of 2024. It is more reasonable to cut twice, once in September and once in November, for a total of 75 basis points by the end of the year. This suggests potential opportunities to increase bond holdings in the coming months. Overall, we believe that emerging market bonds will perform well by the end of the year in an environment of gradually declining interest rates.

Prior to the recent sell-off in early August, we were cautious about chasing global stock market gains, which were mainly driven by soaring global technology stocks. Given the sharp rise in technology stocks earlier this year and investors' efforts to sell assets to make up for losses, there may still be room for further stock market sell-offs in the near future.

George Bourbouras, Head of Research at Melbourne's K2 Asset Management Company, said:

It is obvious that the market is concerned about recent weak economic data. However, inferring from last Friday's job data seems to be an overreaction, as it is only a monthly figure. Three consecutive months of data will be a better guide.

It is obvious that the recent economic momentum in the United States has slowed. Recent improvements in core inflation data in the United States, coupled with some comments from the Federal Reserve, suggest a 25 basis point cut in rates in September. The days of ultra-low US cash rates are over.

Despite market volatility and concerns that recent weak economic data may persist, overall returns and credit conditions remain strong. Given the Fed's intention to start cutting interest rates (implied by futures) before the U.S. elections on November 5th, although there is a rationale for a rate cut, this may appear problematic on the surface. This could exacerbate market volatility ahead of the election.

Ryota Abe, economist at SMBC Nikko Bank in Singapore, said:

I think that due to weaker-than-expected U.S. non-farm payroll data and tensions in the Middle East, the dollar-yen will fall to a range of 140-145. These two factors could create pressure on Asian markets as market participants hesitate to take risks in this situation.

The strength of the yen will also put pressure on the Nikkei index, as corporate profit margins will decline because many companies did not anticipate such a sharp, sudden appreciation of the yen.

Masafumi Yamamoto, Chief Currency Strategist at Mizuho Securities, said:

There is a further risk of the dollar falling against the yen. The recent support level will be 144.50, where the 90-week moving average is located. If that's the case, I think the next target location will be 140.

But I'd like to say that the market's expectation of a 50 basis point rate cut at the September Fed meeting is too high. The U.S. economy is showing signs of slowing, but the situation is not as bad as the market expects.

Charu Chanana, Market Strategist at Shengbao Market in Singapore, said:

There has been a huge shift in market sentiment over the past week, from concern about rising inflation to concern about economic growth and potential economic recession.

Currently, U.S. economic data still dominates, and the more questions are raised about the soft landing assumption for the U.S., the more we can expect further pullbacks in equities and arbitrage strategies, whose positions have already been raised.

However, the market's expectation of a Fed cut is somewhat overblown, given that the June dot plot shows only one rate cut and structural inflationary factors exist. The expectation of four rate cuts this year seems a bit strained.

Editor/Lambor