Last week so far, I believe most global market participants have been asking a simple question everywhere, "Why are people selling like crazy
The Japanese stock market collapsed, the US stock market collapsed, and even European and emerging market stock markets suffered significant setbacks. Goldman Sachs trader Lindsay Matcham, from the perspective of a market participant, listed a series of reasons that traders currently believe are driving the sudden "freeze" of global risk appetite sentiment over the weekend
Japan's yield curve flattens
The Bank of Japan raised interest rates last week while emphasizing that real interest rates are in negative territory and opening the door for future rate hikes. The Japanese stock market initially cheered the news, with large bank stocks rising 4.50%. However, the local interest rate market has begun to paint a more bearish picture; The yield curves of 2-year and 10-year Japanese bonds (2s10s) began to sharply flatten, indicating that interest rate hikes and potential future rate hikes were priced as restrictions on Japan's economic growth and inflation, ultimately hitting the Japanese stock market.
(2s10s curve of Japanese bonds)
Japanese yen strengthens/arbitrage liquidation
The recent significant strengthening of the Japanese yen against the US dollar has triggered the liquidation of arbitrage trades, which is a self reinforcing/negative feedback loop process - as stop losses are triggered, previously overinflated arbitrage positions are increasingly being liquidated. When last week's US data disappointed, the Japanese yen was sought after as a safe haven in the foreign exchange market, further exacerbating this trend and disrupting market positions and pricing, resulting in a series of chain reactions on global risk assets.
Powell closely monitors the labor market
Powell's speech at last week's interest rate meeting did not bring any real surprises. As expected, Powell hinted at a rate cut in September and reserved the possibility of more rate cuts in the future, while also discussing the fragility of the labor market. The market has shifted from extreme concerns about inflation to extreme concerns about slowing economic growth - all eyes are focused on the labor market. Powell said he is carefully observing whether there will be a greater decline in the labor market, which keeps the market vigilant.
Soft landing expectations hit
The 2008 economic recession was caused by the accumulation of a large amount of private and household debt, but in this cycle, all debt was previously driven by fiscal stimulus. The central bank printed a large amount of money to fill the gap caused by the epidemic and attempted to promote economic growth (these debts can be easily managed by the central bank), and the debt situation on the balance sheets of households and companies is relatively good.
This allows interest rates to remain at a consistently high level, and to some extent explains why the economy has not encountered any problems despite such tight financial conditions, as well as why the market has been anticipating a soft landing for some time.
However, with economic growth now slowing down and inflation being left behind, the market has become extremely sensitive to negative data. In addition, the potential lag effects of high interest rate environments on employment, growth, and the economy are gradually becoming apparent. This is why we have entered an environment where economic bad news is market bad news.
Bad news is bad news
The market believes that the Purchasing Managers' Index for manufacturing is extremely important for the direction of economic trends, and last Thursday's US ISM Manufacturing Index further fell to 46.8, far below the industry consensus expectation of 48.8, which has caused panic in the market.
This can be derived as: the ISM manufacturing index is in a recession zone+the US federal funds rate at a high level above 5.25%=the soft landing atmosphere evolves into recession concerns=typical global macro risk aversion (Risk Off) sentiment breeds accordingly.
The US July unemployment rate, announced last Friday, has further risen to 4.3%, while market expectations are at 4.1%, driving a further bull market steepening of the US Treasury yield curve. The market is currently pricing at least 4.4 interest rate cuts for the rest of the year, which has pushed gold further higher and the VIX index to a new high for the year.
Classic global macro risk aversion situation
After the risk of economic recession intensifies, bond yields, inflation expectations, and the stock market all decline without exception. The 2S10S curve of US Treasury bonds has become steeper in the bull market, with gold rising and US stock hedging costs increasing - the VIX index has surged, with more interest rate cuts being priced on the curve, credit spreads widening, and the Japanese yen strengthening.
[align center] (VIX index surges, credit spreads widen)
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