The more full the expectation is, the faster it will fall when redeemed!
Just before the release of the Federal Reserve's interest rate decision, the Asia Pacific stock market plunged this afternoon. The Taiwan Weighted Index rose and turned red in the morning, but fell sharply by over 1% in the afternoon. At the same time, the Nikkei 225 index rose 1.3% in the morning and turned green at one point in the afternoon. So, what exactly happened?
Firstly, after a sharp decline last night, the Japanese yen has once again appreciated significantly today, and Asia Pacific currencies have also risen across the board. This seems to reflect the expectation of a 50 basis point interest rate cut by the Federal Reserve. However, if this is true, the reversal of carry trades may once again affect the equity market.
Secondly, from a structural perspective, analysts point out that the current pre order orders for iPhone 16 are not as expected. Hon Hai's stock price plummeted by over 4% today. Foxconn also showed a trend of more decline than rise, and TSMC's performance in the US stock market last night was not optimistic.
Diving
Today, the trend of the Asia Pacific market is somewhat surprising. Because the US stock market did not plummet last night, and the expectation of the Federal Reserve cutting interest rates is also very strong. In this context, the equity market should have some performance. However, this morning, the Taiwan Weighted Index briefly rose, but the trend was weak, and in the afternoon it plunged sharply, with the decline expanding to over 1% at one point. As of the close, the index fell 0.8% to 21678.84 points. The Nikkei 225 index rose more than 1% in the morning session, but turned green at one point in the afternoon.
So, what exactly is the reason? Analysts believe that there may be two main reasons:
Firstly, the Japanese yen. This morning, the Japanese yen surged sharply, rising 0.7% to 141.41 during trading, ranking first among major currencies in the Asia Pacific region in terms of gains. Most non US currencies have followed suit and rebounded.
In the long run, the bullish trend of the Japanese yen is becoming increasingly clear, while the impact of carry rate reversal trading may still exist. At present, the US Japan interest rate differential has significantly narrowed to below 3.5%; Leveraged operations are becoming increasingly tight. The Japanese yen is the world's largest financing currency, and many people borrow yen to invest overseas. With various uncertainties increasing, investors who borrow yen to long the stock market are nervous. In addition, the Bank of Japan will continue to raise interest rates, which will increase financing costs. The tightening policy of the Bank of Japan has significantly reduced the scale of bond purchases, and the yen may not be as weak as before.
Next is the structure. At present, the market generally believes that iPhone 16 pre order orders may not be as expected. Tianfeng International analyst Guo Mingchi said that the estimated pre order sales of the iPhone 16 series in the first weekend were about 37 million units, a decrease of about 12.7% compared to the first weekend sales of the iPhone 15 series last year. The key is that the iPhone 16 Pro series was lower than expected. This led to a sharp drop in Hon Hai's stock price today, with Hon Hai's stock prices experiencing more declines than gains. In addition, TSMC's ADR fell 1.02% on Tuesday, and fell for two consecutive days during the Mid Autumn Festival, with a decline of 3%. TSMC opened lower on Wednesday, dropping nearly 1.5% at one point.
Subsequent expectations
So, what are the future expectations for the Taiwan stock market?
Firstly, from a structural perspective, the trend of Taiwan stocks is largely determined by the trend of electronic stocks. Guo Mingchi pointed out that the shipment time of the iPhone16 Pro series is significantly lower than that of the iPhone15 Pro series. In addition to an increase in pre order inventory, the key reason for the year-on-year decrease in sales in the first weekend is that demand is lower than expected.
However, there are also different voices. According to Wu Yuezhan, an analyst at Asia Securities Investment Advisory, Apple sells over 200 million iPhones a year, and this new phone is mainly targeted at users of iPhone 12 and 13, with the goal of attracting a wave of phone replacements. With a total of 800 million phones over the course of four years, this time attracting about 30% of phone replacements will meet the standard, so there is no need to be pessimistic. Wu Yuezhan also stated that Apple is currently in a leading position and does not need products with explosive performance, especially since users have always had delayed demand characteristics, such as smartphones, 5G and other technologies. Apple's launch of AI phones this time is not intended to sweep the market, and the upcoming iPhone 17 will be an important observation point.
Secondly, the Federal Reserve's expectation of interest rate cuts. Currently, traders in global financial markets are waiting for the Federal Reserve to cut interest rates on Wednesday and are facing great uncertainty, which could lead to a series of market fluctuations. Although financial markets anticipate that Federal Reserve decision-makers are likely to initiate a easing cycle with a 50 basis point rate cut, major securities firms still expect the Fed to lower interest rates by 25 basis points at the end of its two-day monetary policy meeting. Analysis suggests that although Federal Reserve decisions often affect the market, traders' expectations of a 25 basis point and 50 basis point rate cut by the Fed are relatively balanced, so whatever measures the Fed takes may surprise traders. Deutsche Bank even analyzed that the Federal Reserve may create the biggest surprise in 15 years.
It is worth noting that the US dollar interest rate will affect the foreign exchange market, thereby expanding the fluctuation range to the equity market. Francis Tan from CA Indosuez Wealth Management stated that the Japanese yen is still undervalued against the US dollar and believes that there is still room for further appreciation of the yen, and the closing of carry trades has not yet ended. Last month, driven by the Bank of Japan's interest rate hike, the yen rose, severely hitting arbitrage trading in emerging markets and causing the Nikkei 225 index to experience its worst decline since 1987. There are also similarities this time. Investors have different opinions on whether the Federal Reserve will initiate loose policy by cutting interest rates by 50 basis points. On the one hand, a 50 basis point interest rate cut may raise doubts about the health of the US economy, leading to a sell-off of emerging Asian assets. This may also drive the yen to strengthen, prompting investors to liquidate risk asset arbitrage positions based on yen financing; On the other hand, a 25 basis point interest rate cut may benefit the stock market, with emerging markets in the Asia Pacific region potentially being the main beneficiaries.