Where Will Global Stock Markets Go After the Massive Shock?

The yen carry trade and concerns about a U.S. economic recession, among other factors, have triggered a global stock market "earthquake."

However, some institutions tend to view it as an opportunity for medium to long-term positioning.

At the beginning of August, a storm swept through the global stock markets.

Due to the unexpected interest rate hike by the Bank of Japan, which triggered the liquidation of yen carry trades, coupled with market concerns about rising U.S. unemployment rates leading to a recession and the tense geopolitical situation in the Middle East, the global stock market experienced "Black Friday" (August 2) and "Black Monday" (August 5).

Especially on August 5, the stock markets in Japan and South Korea plummeted, with several indices triggering circuit breakers.

However, after positive statements from regulatory authorities in various countries, the reduction of carry trade positions, and the release of positive data signals from the U.S., the market's panic has gradually been repaired.

As of August 21, market indices such as the Nikkei 225 and the South Korean Composite Index have rebounded close to their levels at the beginning of August after the massive shock.

On August 14, the U.S. Department of Labor released the Consumer Price Index (CPI) data for July, with a month-on-month increase of 0.2%, and the core CPI also increased by 0.2% month-on-month.

China Merchants Securities described this set of data as "just right," saying it "met market expectations, neither changing the market's expectations for a rate cut in September nor intensifying concerns about an economic recession."

Combining the views of several domestic and foreign institutions, in addition to the aforementioned factors, another important factor affecting the global stock market shock this time is that overseas assets at high positions and crowded trading have amplified fluctuations due to short-term capital deleveraging.

A "soft landing" for the U.S. economy is still the basic assumption, and many institutions tend to view this "earthquake" as an opportunity for medium to long-term positioning.

"The most intense phase of overseas asset price fluctuations may have passed, and there may still be some aftershocks, but it is not expected to see a deep decline again," said a QDII fund manager in Shanghai, who remains optimistic about the medium to long-term performance of overseas assets, including U.S. stocks and bonds.

"Overseas technology stocks were hit the hardest in this round, and after the adjustment, they may be a good choice for allocation."

Some institutions also believe that this adjustment will bring about a rebalancing of assets within the U.S. stock market.

"The recent significant fluctuations in large-cap U.S. growth stocks highlight the high valuation risks of large-cap stocks that were previously overlooked by the market.

It is expected that investors will be more cautious about large-cap growth stocks in the future and will also look for other opportunities in the market," said Jiang Xianwei, a senior global market strategist at J.P. Morgan Asset Management China, to Caijing.

This could bring about an opportunity for a redistribution of overall U.S. stock valuations.

What impact might the A-share market experience in this global market fluctuation?

On this issue, there is a significant divergence of views among institutions.

Optimists believe that global stock market fluctuations may lead some risk-averse funds to flow to A-shares with lower valuations.

Pessimists, on the other hand, believe that under the expectation of a recession, all equity assets will be impacted.

If a more extreme liquidity shock occurs, it may trigger indiscriminate asset sales.

"Recently, the fluctuation of overseas asset prices has been amplified, and A-shares have fully priced in the economic weakness since the second quarter.

While the periphery is undergoing drastic changes, the Shanghai Composite Index has remained relatively stable.

In the medium term, the certainty of overseas rate cuts and further efforts in domestic growth policies is relatively strong, and the market's upward potential is greater than the downside risk, so it should actively do more," said a person in charge of Bosera International to Caijing.

"In the Chinese stock market, the importance of internal factors is becoming increasingly prominent.

The implementation of policies and the stability of the real estate market are key to affecting market confidence," said Liu Jinjin, Chief Equity Strategist of Goldman Sachs China, to Caijing.

CICC believes that "significant fluctuations in overseas markets usually lead to emotional resonance, and extreme liquidity shocks may even trigger indiscriminate asset sales."

On August 23, local time, Federal Reserve Chairman Powell made it clear at the annual meeting of central banks that "the time to adjust policy has come."

This is the strongest signal of interest rate cuts released by the Fed so far.

The industry generally expects that the Fed's interest rate cut in September this year has become a high probability event.

With the expectation of interest rate cuts heating up, U.S. stocks have rebounded significantly, and gold prices have also risen sharply, breaking through $2,515 per ounce.

The U.S. dollar index has fallen sharply, breaking through the 100 integer mark.

Yang Delong, Chief Economist of Qianhai Source, expects that with the expectation of interest rate cuts by the Fed heating up, the possibility of high-level fluctuations in U.S. stocks is relatively large.

Relatively speaking, A-shares and Hong Kong stocks are currently in a historical bottom area, belonging to the valuation lowland of the global capital market.

When the European and American stock markets are at a high level of fluctuation, some funds will take profits in advance and look for new valuation lowlands, which also brings certain opportunities to A-shares and Hong Kong stocks.

Although the global market shock has passed two weeks, the shock of the global stock market on August 5 still leaves an indelible shadow in the hearts of many investors.

"On August 5, near noon, I saw many people on social media spreading the news of the Japanese stock market circuit breaker, and I thought it was a P map until I checked the stock software to believe it.

The Japanese stock ETF I bought fell by 9% that day, and this lesson may be remembered for a long time."

A personal investor bought many cross-border ETFs in the first half of the year and cleared all cross-border ETFs in his hands after the global stock market rebounded on August 6.

This investment ended in a loss.

In the "Black Monday" that many global stock markets encountered, the Japanese stock market fell the most severely.

On August 5, the Nikkei 225 index fell by 12.40%, the largest single-day drop since 1987; the Tokyo Stock Price Index fell by 12.23%, wiping out all gains since 2024; futures trading of the Nikkei 225 index and the Tokyo Stock Price Index once triggered the circuit breaker mechanism; the South Korean KOSPI index fell by 8.77%, triggering the circuit breaker mechanism; the Singapore Straits Times index fell by 4.07%; the Australian ASX200 index fell by 3.7%; the New Zealand NZX50 index fell by 1.51%.

On the same day in the European and American markets, the European Stoxx 50 index, the German DAX index, the British FTSE 100 index, and the French CAC 40 index all fell significantly.

The Turkish stock market triggered the market circuit breaker mechanism twice after opening.

The three major U.S. stock indexes all closed down, with the Nasdaq index falling more than 6% at the beginning of the day and closing down 3.43%.

Nvidia and Tesla fell more than 20%, and the total market value of the U.S. stock "seven sisters" evaporated by $1.3 trillion, accounting for 20% of the global stock market's evaporated market value that day.

The sharp decline in U.S. stocks has plunged American retail traders into panic selling, and many U.S. brokerage websites, including Charles Schwab, Fidelity Investments, Vanguard, and Robinhood, have crashed.

Affected by the overseas stock market, the cross-border ETFs in the Chinese market fell collectively on August 5.

Wind (Wangde) data shows that among the 128 cross-border ETFs in the market, 127 closed down, and the remaining one was flat.

Among them, the Nikkei 225 ETF (513880), Nasdaq Technology ETF (159509), Nikkei ETF (159866), Asia-Pacific Selection ETF (159687), and Nikkei 225 ETF Yifangda (513000) fell by more than 9%.

The global market panic on August 5 did not last long.

In fact, on August 6, the Asia-Pacific market rebounded, with the Nikkei 225 index rising by 10.23%, the largest single-day increase since October 2008; the South Korean GEM index futures soared, triggering the suspension mechanism, and the South Korean Composite Index closed up by 3.3%; European major stock indexes all rose collectively.

The VIX index, known as the "fear index" of the U.S. stock market, has fallen from a high of 38.57 on August 5 to around 15.3 on August 15.

From the continuous decline at the beginning of August to the rebound after August 6, the market trend seems like a roller coaster.

Investors are also confused about whether this storm has ended, whether the causes that triggered the storm will come back, and where the global stock market will go next.

Why did the shock occur?

Combining the views of several institutions, this global market fluctuation is the result of the resonance of multiple factors: the Bank of Japan's interest rate hike triggering carry trade liquidation is the dominant logic, coupled with the high overall valuation of U.S. stocks, technology stocks' performance not meeting expectations, and weak U.S. inflation data, leading to market fluctuations beyond expectations.

Why does the yen carry trade have such a huge impact?

This is because the Bank of Japan has long implemented a zero interest rate policy, allowing global investors to obtain funds at low cost and invest in high-interest markets.

The recent narrowing of the U.S.-Japan interest rate differential has triggered the rise of the yen, and the yen has appreciated 13% against the dollar from July 10 to August 5, triggering global market concerns about yen-financed carry trade.

Stocks related to the yen carry trade, such as the decline of U.S. technology stocks, triggered stop-loss sales, leading to declines in multiple stock markets.

Looking back at the initial ripples of this storm, it originated in July this year when the Nikkei 225 index and the Tokyo Stock Price Index set historical highs.

Subsequently, on July 31, the Bank of Japan raised the policy guidance interest rate from 0-0.1% to 0.25% and announced plans to halve its monthly Japanese government bond purchases from January to March 2026, leading to a rapid appreciation of the yen and a reversal of global yen carry trades.

On August 2, the United States released employment reports, with the number of new non-farm employment in July far below expectations and the previous value, and the unemployment rate rose to 4.3%, the highest level in nearly three years, and U.S. stocks and Japanese stocks fell across the board that day.

Liu Jinjin said that on the surface, Japan is the center of this global stock market turmoil, and the emergence of the "Black Monday" led by the Japanese stock market is due to the recent narrowing of the U.S.-Japan interest rate differential, and the yen carry trade stop-loss sales of U.S. Treasury bonds and technology stocks.

However, fundamentally, the U.S. market is more critical, and the weak non-farm employment report has triggered market concerns about the risk of U.S. recession.Goldman Sachs' U.S. economists predict that the Federal Reserve will cut interest rates three times by the end of the year starting in September, up from the previous forecast of two times; the chance of a U.S. economic recession in the next 12 months has been raised from 10% to 25%, but Goldman Sachs believes that the risk of continued recession is limited, maintaining the target of the S&P 500 index at 5,600 points.

Although short-term volatility may increase, from an absolute point or fair value perspective, there is still about a 5% upside potential for the U.S. stock market.

In addition, Goldman Sachs' research report points out that the risk of the yen carry trade has been significantly reduced.

The U.S. Commodity Futures Trading Commission (CFTC) data on net non-commercial positions in yen shows that extreme net short positions emerged at the beginning of July, but have since eased to more average levels.

This is consistent with the feedback received by Goldman Sachs, as Liu Jingjin mentioned that the short positions in yen carry trades have dropped from about $15 billion at the beginning of July to over $1 billion currently.

Recent analysis reports from various investment banks are also corroborating this point.

Morgan Stanley believes that 60% of the carry trades have been closed out, while J.P. Morgan estimates that close to 75% of the trades have been closed out, and Daiwa Securities believes that 95% of the yen carry trades have been closed out.

"People should not be caught off guard by this massive shock, as the market volatility was very low before, at an unusual level, and now the market volatility has suddenly returned to a normal level," said Erik Norland, Managing Director and Chief Economist at CME Group.

"Most global markets including China, South Korea, Japan, and Europe still have reasonable stock valuations, but the U.S. stock market has a higher risk, with market valuations being too high.

I am very surprised by the extent of the decline in the Japanese stock market, but the policy effect of the Bank of Japan's interest rate hike has been essentially absorbed, so there should not be additional significant market fluctuations in the future."

After the violent fluctuations in the Japanese stock market, Bank of Japan Deputy Governor Shinichi Uchida made a dovish speech, stating that the current Bank of Japan needs to firmly maintain loose monetary policy and will not raise interest rates when the market is unstable.

Former Bank of Japan board member Seiji Adachi even made a speech on August 12, ruling out the possibility of another interest rate hike this year.

In the United States, the initial jobless claims released on August 8 fell more than expected, which analysts said injected a strong stimulus into the market, significantly easing concerns about a weak labor market.

When making monetary policy decisions, the Federal Reserve will focus on two key indicators: the unemployment rate and the level of inflation.

In the future, the easing of inflation and the potential rise in the unemployment rate will both strengthen the expectation of interest rate cuts.

Reassessing the global market since entering August, the global market trend has been like a roller coaster.

Under the fluctuations, both institutions and individuals interviewed believe that this is a good opportunity to reassess key market trends.

UBS Wealth Management Investment Office issued a research report stating that the Japanese market, which triggered global fluctuations, should stabilize.

In the U.S. stock market, market sentiment has improved, with positive employment data from the United States, and S&P 500 earnings per share are expected to grow by 11% in 2024.

At the same time, the pullback in stocks has reduced the 12-month forward price-to-earnings ratio of the U.S. technology sector to 27.4 times, lower than the highest value of 32 times on July 10.

It is expected that the Federal Reserve may cut interest rates by 100 basis points within the year.

In addition, to cope with the further escalation of geopolitical situations, allocating oil and gold can add protection to the investment portfolio.

It is expected that by the end of September, Brent crude oil prices will reach $91 per barrel, and by mid-2025, gold prices will rise to $2,700 per ounce.

Haitong International believes that the current higher U.S. interest rates provide enough ammunition to prevent the occurrence of a deep recession, so the probability of a U.S. recession dragging down the Japanese economy and causing the Japanese stock market to adjust deeply again is not high.

Regarding this global stock market turmoil, Morgan Stanley China's Chief Economist, Xing Ziqiang, said that although the current overseas financial markets are violently fluctuating, and there are concerns about the downward trend of the U.S. economy and the prospects of AI (artificial intelligence) technology, it does not deny that the world is still at the beginning of a new round of technological revolution.

The adjustment and reflection of the global market on the AI industry are healthy, in line with the development law of new things, and are adjustments after the trend trading of the capital market has gone too far.

"When trading a recession expectation, all equity assets will be impacted, and this round of impact may continue until the Federal Reserve actually cuts interest rates or the previous data is found to be unsustainable."

Jing Shun Great Wall Fund Manager Zhang Xiaonan analyzed that from the historical experience, when trading a recession expectation, it is actually the cash-rich large companies that are less affected.

Zhang Xiaonan believes that when the style switched before, the technology giants have already had a certain adjustment, and the current valuation of U.S. technology stocks is gradually regaining attractiveness.

Although there is a certain criticism of the capital expenditure of the technology giants in the market, the trend of this round of AI wave is very clear, and there is a very high possibility of becoming a long-term investment theme for the next five to ten years.

What risk factors should be vigilant about now?

An overseas investment experience of more than ten years QDII fund manager analyzed that the current market's pricing for the U.S. recession is quite full, and even quite aggressive, but its expectations may not be realized.

If the subsequent inflation data strengthens or the economic growth data shows strong performance, the Federal Reserve may not act as aggressively as expected, and U.S. Treasury yields may continue to fluctuate significantly.

If the subsequent corporate performance is not as expected, the market may be hit again, but for now, many companies' performance is still acceptable.

In addition, the monetary policy of the Bank of Japan or the European Central Bank is quite different from expectations, such as the Bank of Japan's unexpected interest rate hike, or the European Central Bank's interest rate cut is less than expected, which may also affect the market.

Can A shares stand alone?

Compared with the violent turmoil in overseas markets, the trend of A shares is relatively independent.

Liu Jingjin believes that from the perspective of overseas investors, against the background of the current large fluctuations in the Asia-Pacific stock market, the fluctuations of A shares and H shares are lower than those of the Japanese, South Korean, and U.S. stock markets, which have a relatively positive risk diversification effect and have become a more defensive market.

"Chinese stock market valuations have returned to a lower level, and the MSCI China Index price-to-earnings ratio is about 9 times, lower than the average level.

If the global market continues to fluctuate in the next period, the Chinese stock market may perform better, but in terms of absolute returns, there is still a need for more policy implementation and the stabilization of the real estate market."

Liu Jingjin said, "Goldman Sachs is optimistic about A shares from a strategic perspective, because the pricing of corporate reform and policy easing is attractive.

From an industry perspective, maintain an overweight position on Chinese Internet."

On the other hand, what disappoints A-share investors is that in the process of overseas markets repairing the lost ground, the Shanghai Composite Index is still hovering at a low level.

As of August 15, the Shanghai Composite Index closed at 2,877 points.

A-share investors are also very concerned about whether the fluctuations in overseas markets will become a "seesaw" that prompts funds to flow back to A shares?

"There are three prerequisites for capital inflow: first, the fundamentals of China's economy have improved significantly; second, the U.S. economy weakens, and the Federal Reserve begins to cut interest rates; third, the renminbi continues to strengthen.

The current market's recession trading may be too aggressive and needs further confirmation of the weakening of the U.S.

economy."

The aforementioned interviewed QDII fund manager believes.

Looking at the flow of funds from the north, during the global market fluctuations, the funds from the north showed a characteristic of selling more and buying less.

However, on August 15, there was a net purchase of 12.2 billion yuan.

In addition, the market is still worried about the slowdown in U.S. economic growth, and whether it will drag down China's exports?

CICC believes, "Although we do not agree with the view that the U.S. economy is facing urgent systemic recession pressure, the slowdown in growth is also an undeniable fact.

The slowdown in growth, the partial advance of exports in the first half of the year, and the policy uncertainty brought by the U.S. election at the end of the year may make the export, which is the main contribution to domestic growth, contribute less marginally in the second half of the year, especially considering that domestic demand is still weak."

Caitong Fund Research Department said, "The future market may fluctuate upwards."

It believes that with the convening of the 20th Central Committee and the Central Political Bureau meeting on July 30, and the signs of marginal weakening of external demand, the turning point of domestic demand policy has gradually emerged, and the environment of weak domestic demand has gradually turned around since the second half of the year.

The expected overall performance of the listed companies' semi-annual report is stable, and the valuation of A shares has returned to a historical low, and the volatility of funds is gradually converging.

In terms of the external environment, under the weak global economy and the interest rate cut cycle, the external liquidity environment faced by A shares has begun to improve, and the probability of market stabilization has further increased, and the allocation idea is also expected to turn.

Compared with A shares, Hong Kong stocks, as an offshore market, have a stronger linkage with overseas markets.

Huaan Fund analyzes that as risks are phased out, the U.S. stock market stabilizes and rises, and the scale of foreign capital net outflows from Hong Kong stocks has narrowed, but the sustainability needs to be observed.

"The overseas market may still fluctuate significantly in the short term, and the domestic fundamentals continue to recover weakly, leading to an unclear trend in Hong Kong stocks.

However, in the domestic low-interest-rate environment, Hong Kong stock central enterprise dividends, with their high dividends and low valuation characteristics, are expected to attract more funds.

Especially after the recent slight adjustment of the high dividend strategy, the dividend rate has further increased, and the configuration value of Hong Kong stock dividends is increasingly prominent."

Huaan Fund believes.

Guotai Fund believes that in the short term, the environment of stable growth policy efforts and the approaching overseas interest rate cut window is conducive to the core assets to continue to rebound from the oversold, especially the power equipment and new energy, pharmaceuticals, and finance, while the dividend sector is more affected.

However, in the long term, the macro environment in the second half of the year will be more complex, and the technology and security sectors are still the main lines of policy.当然可以，请提供您需要翻译的内容。