Source:Brokerage China.

Original Title: "Bearish Attack! Just Now, Plunge!"

In the morning session today,$Nikkei 225 (.N225.JP)$The index's decline widened to over 3% at one point. $Toyota Motor (7203.JP)$Please use your Futubull account to access the feature.$Mitsubishi UFJ Financial Group (8306.JP)$ Fell more than 4%. $Korea Composite Index (.KOSPI.KR)$ Once fell more than 2%. Subsequently, the decline in these stock indices narrowed. It is worth noting that the Egyptian stock index, which opened first yesterday, fell more than 2.4%, along with the Saudi stock index, marking the largest single-day decline in nearly a month.

On the funding side, there is a continuous bearish tone. Goldman Sachs recently stated that global hedge funds have been selling stocks for the fifth consecutive month in August, at the fastest pace since March 2022. At the same time, Bank of America stated that in the past week ending last Wednesday (4th), investors injected $61 billion into money market funds, in anticipation of the first rate cut by the Federal Reserve in 4 years. This is completely opposite to market expectations.

So, what kind of logic is unfolding in the global market?

Crash

In early trading today, the Nikkei 225 Index and the TOPIX Index opened down 1.6% and 1.7% respectively. The South Korean stock market opened down 1.8%. Shortly after the opening, the Nikkei 225 Index widened its decline to 3%, and the Korean stock index widened its decline to 2%. The S&P/ASX index of the Australian stock index fell 1.2%. The MSCI Asia Pacific Index fell 1%. Subsequently, the declines of major indexes narrowed, but all of them operated at low levels.

It is worth mentioning that the Middle Eastern stock market, which opened on Sunday (September 8th) Beijing time, was also bleak. The Tadawul All Share Index fell 0.97%, the largest single-day decline since August 5th, to 11,982.30 points, approaching the closing price of 11,981.40 points on August 18th. The index fell below the 200-day moving average, the 100-day moving average, and approached the 50-day moving average (the temporary values of these three technical indicators were 12,044.29 points, 12,011.77 points, and 11,965.58 points, respectively). Saudi Aramco (ARAMCO.AB) fell 0.91%, continuing its decline for several days. The EGX 30 Index of the Egyptian Stock Exchange fell 2.44%, also the largest single-day decline since August 5th, to 30,273.73 points.

So what caused the market sell-off? Analysts believe that the main reason is the expectation of a US interest rate cut. The increase in non-farm payrolls in August was 142,000, less than the market expectation of 160,000. A US interest rate cut in September is already a foregone conclusion. However, historically, the US preventive interest rate cuts have been difficult to drive equity markets higher in the early stages. Michael Hartnett, Chief Investment Strategist at Bank of America, said that the market is 'selling the first interest rate cut' and risk assets have been actively leading the Federal Reserve and are no longer concerned about lower growth.

On the other hand, Asian traders will assess the revised data for Japan's second-quarter GDP, which was announced on Monday. Japan's second-quarter GDP grew at an annual rate of 2.9%, lower than the economists' expectation of 3.2% and the preliminary estimate of 3.1% by Reuters. After a sharp rise last Friday, today the yen against the US dollar also fell 0.2% to 142.55, leaving a nine-month low hit last Friday. In addition, due to the substantial adjustment of nominal wages in July in Japan, real wages increased by 0.4% year-on-year, and nominal wages increased by 3.6% for 31 consecutive months. Combined with events such as the rice shortage in Japan, inflation expectations in Japan are rising rapidly. This also means that the need for the Bank of Japan to raise interest rates is increasing.

Unexpected capital outflow

It is worth noting that many fund managers were hoping that the interest rate cuts would reduce the returns of money market funds and invest a large amount of cash in stocks and bonds. However, global funds did not flow into the stock market due to the interest rate cuts by the Federal Reserve, but risk aversion instead surged significantly.

The latest data from Bank of America shows that in the week ending last Wednesday (the 4th), investors injected $61 billion into cash market funds in anticipation of the Federal Reserve's first interest rate cut in four years. However, contrary to intuition, large investors tend to turn to money market funds because the range of short-term fixed-income assets they hold typically offers higher long-term returns than short-term Treasury bonds, and the yield on short-term Treasury bonds is highly sensitive to the Federal Reserve's interest rate.

Bank of America quoted EPFR data in its weekly Flow Show report, stating that in the week ending last Wednesday, investors poured $60.8 billion into cash funds, and the cumulative cash inflows in the past five weeks reached $231 billion, the largest amount since December 2023.

Currently, the US interest rate is in the range of 5.25% to 5.5%, and the yield of money market funds has reached the highest level since the 2008 financial crisis. According to data from the Investment Company Institute, the size of the US money market fund currently exceeds $6.3 trillion, higher than the $3.6 trillion at the beginning of the outbreak.

In addition, the latest data from Goldman Sachs shows that in early August, due to concerns about the US economic recession and the unwinding of large-scale yen arbitrage trades, global stock markets collapsed and global investors turned to safe-haven mode. According to weekend reports, the bank said that the accelerated selling was mainly due to increased short selling of individual stocks and moderate selling of long positions. The selling was mainly led by the technology, industrial, and non-essential consumer goods sectors. In terms of regions, North America and Japan led the way, with the Japanese stock market experiencing its most severe sell-off since December 2018. However, the bank did not disclose the size of the sell-off. On August 5, the Nikkei 225 index in Japan fell 13%, marking the most severe single-day sell-off since 1987 and prompting officials from the Bank of Japan to lower the possibility of raising interest rates in the near future.

From a global macro perspective, there have indeed been some pessimistic expectations. According to the latest forecast from the United Nations Conference on Trade and Development, global economic growth will decline to 2.6% in 2024, slightly above the 2.5% threshold usually associated with economic recession. Inflation is expected to continue to cool, although in many countries, the easing of price pressures will take longer than the time of occurrence. The latest forecast from the Organization for Economic Cooperation and Development also shows that global economic growth will slow to 2.7% in 2024, the lowest annual growth rate since the global financial crisis.

Analysts believe that considering the current macroeconomic situation, it will not be easy to quickly overcome a recession once it occurs. A recession will pose severe challenges to governments of various countries and they must make choices between high inflation and a strong economy.

Editor/Emily