Source: Quan Shang Guo , Author: Shi Qian

Just now, the Japanese and South Korean stock markets have completely rebounded. The Nikkei 225 index rebounded more than 10% at one point, while the KOSPI stock index in South Korea rebounded more than 5% at one point. After yesterday's steep decline, the sharp rebound in these two stock markets is very eye-catching. Meanwhile, U.S. post-market futures also rebounded significantly.

Analysts believe that the strong rebound may be partly due to the expected management of the corresponding countries. South Korea stated that the government and the Central Bank of Korea have sufficient policy capabilities and will take measures in the event of excessive market fluctuations. Forex and currency markets show stable trends. Japan's Chief Cabinet Secretary, Yoshihide Suga, said that the Japanese government will continue to monitor market trends and stabilize economic and financial operations. On the other hand, there is also a demand for rebounds due to excessive single-day declines in the market. The yen also began to soften significantly today.

So,has the problem been solved? From the actions and statements of the Federal Reserve, there doesn't seem to be any obvious change. In addition, after the Asia-Pacific market opened this morning, the Australian stock market, which fell relatively less yesterday, did not show strong performance.

Big rebound in Japan and South Korea

In the morning, the stock markets in Japan and South Korea were crazy. The Nikkei 225 index rose more than 10% at one point, closing the index down 12.4% yesterday. The KOSPI index in South Korea rose more than 5%, and there was also a large decline yesterday. The MSCI Asia-Pacific Index rose 2%.

So what happened, exactly?

First of all, the expected plunge in the U.S. market did not occur last night. Although the decline was large, the post-market futures rebounded strongly, which greatly eased the bearish atmosphere when the Asia-Pacific market opened.

Secondly, from Japan's data, it can be seen that Japan's household spending in June fell more than expected, with an actual decline of 1.4% year-on-year. The average monthly income of households increased by 3.1% year-on-year, and the larger-than-expected decline may restrain the Bank of Japan's interest rate hike plan. Today, the Japanese yen started to fall sharply. A falling yen is beneficial for a global rebound in the stock market and is also conducive to easing the trend of yen carry trade reversal to some extent.

Thirdly, South Korea stated that the government and the Central Bank of Korea have sufficient policy capabilities and will take measures in the event of excessive market fluctuations. The South Korean presidential office's senior official said on the 5th that the presidential office, the government, and relevant departments will closely monitor the stock market trend 24 hours a day and take measures according to emergency plans when necessary. The official said that last week, starting from the second half of the week, the global stock market experienced a collective adjustment due to concerns about the slowdown in the U.S. economy, deterioration in the performance of major U.S. enterprises, etc. The presidential office, the government, and relevant departments are analyzing and responding to the domestic and foreign situations. The government held a financial risk assessment meeting that morning and a joint emergency inspection meeting of the Financial Commission and the Financial Supervisory Authority in the afternoon to understand the market situation. On the morning of the 6th, the Deputy Prime Minister of the Economy, the Governor of the Bank of Korea, the Chairman of the Financial Committee, and the Director of the Financial Supervisory Authority will attend regular macroeconomic and financial impasse-related discussions. Attendees will analyze the market movements from the night of the 5th in major stock markets such as Europe and the United States and discuss comprehensive plans to stabilize the stock market. According to reports, President Moon Jae-in, who is on vacation, was briefed on the stock market crash on the same day.

Pepperstone's research director Chris Weston said that the shocking historical trend in Asian stock markets yesterday was mainly due to the large-scale liquidation of margin positions. A strong rebound in the opposite direction is expected to appear at the opening today. However, he warned that the implicit volatility of the Nikkei 225 index has reached 70%, which means that the market may continue to experience severe fluctuations for a period of time. After such an intense leverage adjustment, Japan's major banks have already suffered heavy losses, and only the bravest investors will have confidence in buying.

So, has the stock market stopped falling? Has the problem been resolved? Judging from the reaction of the Federal Reserve, it can be described as "smooth sailing".

Firstly, the overnight reverse repurchase agreement scale of the Federal Reserve did not see a sharp decline, which means that there was no huge liquidity release. In addition, after SOFR fell slightly, it did not fall again last night, but maintained a stable position.

Secondly, in response to Monday's sell-off, the Federal Reserve does not seem to have too much reaction. Chicago Federal Reserve Bank President Charles Evans said that the Federal Reserve will take action to "repair" any signs of deterioration in the U.S. economy, but the U.S. economy does not seem to be in a recession. The Federal Reserve's mission is very simple, which is to maximize employment, stabilize prices and maintain financial stability. Any "deterioration" that may occur will be resolved.

Mary Daly, president of the San Francisco Federal Reserve, said at an event in Hawaii that officials "will do everything possible" to achieve the central bank's price stability and employment goals, but she said: "We will consider all information before taking action."

Steven Kelly of Yale University's Financial Stability Project wrote on social media platform X, "The statement that the Federal Reserve will take emergency policy measures in response to what we have seen so far is just a saying on Twitter. We are very far from rate cuts between meetings, let alone any loans or market intervention."

Usually, when the Federal Reserve has considered an emergency rate cut in the past, it has generally coordinated action with other central banks so as to respond to very serious financial crises or periods of rapid economic decline -- such as during the height of the pandemic at the beginning of 2020. However, on Monday, most observers believed that this situation was unlikely to occur at present.

Editor/Lambor