Global stock markets have been volatile lately.
U.S. stocks fell sharply, with the S&P 500 falling 1.37% and the Nasdaq falling 2.30% on Thursday, August 1, Eastern time. Europe's three major stock indexes fell across the board on Thursday, with United Kingdom's FTSE 100 down 1.01%, Germany's DAX 30 down 2.30% and France's CAC 40 down 2.14%.
The U.S. stock market, especially technology stocks, has experienced a relentless sell-off. In addition to Meta (META. US), Nvidia (NVDA. US), Apple (AAPL. US), Amazon (AMZN. US) and other star technology stocks fell, and Intel's stock price plummeted 18.9% after hours, becoming the focus of the market.
Asian markets were not spared, with the Nikkei 225 falling nearly 6,000 points, or nearly 15%, in just two days, the biggest drop in nearly 16 years. The decline not only shocked investors, but also raised concerns about the global economic outlook.
1. The rout of tech stocks caused by the bursting of the AI bubble?
Artificial intelligence (AI) technology used to be the darling of capital markets, but as the market reevaluates, the expectation that the AI bubble is about to burst has become an important reason for the collapse of technology stocks.
According to U.S. media, OpenAI is currently able to earn about $2 billion a year through ChatGPT, and is expected to receive nearly $1 billion through large language model fees. OpenAI's total revenue for a month is around $283 million, and its annual revenue is estimated to be between $3.5 billion and $4.5 billion. As a result, OpenAI's annual losses could be as high as $5 billion, and its cash flow could be depleted in the coming year.
Concerns were heightened by the release of second-quarter earnings reports from Google's parent company, Alphabet. Google Cloud business and search revenue (both related to A investment I) have not shown a steady upward trend in revenue growth over the past year.
As the "Cardinal Master" said in the short video, "Goldman Sachs, Sequoia and other institutions have calculated that the entire artificial intelligence industry has to earn $600 billion to be worthy of the current hardware expenditure, but as a result, OpenAI only has $3 billion in revenue, and most people in the entire industry don't make money." ”
Goldman Sachs stressed that investor enthusiasm could begin to fade if important use cases don't start to become more apparent in the next 12-18 months.
Goldman Sachs believes that "tech giants plan to spend $1 trillion on AI capital expenditures in the coming years, but there are few substantial, visible results to justify these investments." Goldman Sachs pointed out that the current situation is not quite the same as the early days of Internet technology application. Even in the early days of Internet technology, low-cost solutions could replace high-cost solutions. AI is now expensive and doesn't offer a cheaper alternative.
Goldman Sachs also judged that the actual impact of AI on the economy in the next decade will be limited, AI will only increase United States productivity by 0.5%, GDP by only 0.9%, which will lead to a lot of money invested may be wasted, and the trillions of dollars in market value obtained by the "seven sisters" of the US stock market may be the largest bubble in history.
This pessimistic outlook for the future of AI technology has led to a decline in investor confidence in technology stocks, and funds have begun to withdraw from the space. At the same time, the panic in the market was further exacerbated by negative news from the tech giants: Intel, for example, underperformed; In another example, Nvidia's stock price has been affected by rumors of the postponement of the AI project, "a Hong Kong research institute called Aletheia Capital said that the mass production of Blackwell has been fully delayed until 25Q1".
In addition, news of antitrust regulation in the United States has also put pressure on technology stocks, and these factors have combined to make technology stocks the hardest hit by the market sell-off.
Second, weak United States economic data has triggered recession speculation
The weak data on the United States economy was a wake-up call to recession fears. United States' ISM manufacturing PMI recorded 46.8 in July, the largest contraction in eight months, while United States initial jobless claims rose 14,000 to 249,000 last week, the highest in nearly a year. The data not only shows that the United States economy may be slowing, but also raises fears of a recession.
Warren Buffett's sell-off has added to the market's unease. Berkshire · Hathaway have reduced their holdings in United States for 12 consecutive trading days since July 17, and their holdings of United States bank stocks have decreased by 8.8% to a total of $3.8 billion.
(Black is the rise of United States banks since the beginning of the year, and yellow is the KBW Bank Index.) Source: Bloomberg)
United States non-farm payrolls data for July, released at 8:30 Beijing time tonight, showed that non-farm payrolls increased by 114,000 in July, but the figure was well below expectations of 175,000. The United States unemployment rate rose to 4.3% in July 2024, which was the highest since October 2021 and up from 4.1% previously.
The rise in the unemployment rate to 4.3 percent means that the Sam Law recession indicator alarm has been triggered, and this indicator has been 100% accurate since 1970. (According to Sam's Law, the United States economy enters a recession when the 3-month moving average of the unemployment rate rises 0.5% or more from the previous 12-month low.)
The above-mentioned Buffett's reduction behavior has also been interpreted by the market as a pessimistic expectation of the United States economic outlook. Judging from the earnings trend of bank stocks historically, the combination of high inflation and high interest rates is good for bank stocks, but Buffett chose to sell United States bank shares at this time, which can be inferred that he does not agree with the inflation narrative, and the Fed's upcoming interest rate cut may be one of the logics of Buffett's reduction in United States banks.
Historical data provides us with a valuable reference. The Fed's rate cuts are often the beginning of a sharp decline in U.S. stocks: from 1998, 2000, 2007 to 2019, the Fed's rate cuts were accompanied by significant pullbacks in U.S. stocks.
** In the first 3 months of the October 1998 rate cut, the S&P 500 pulled back -23%;
** Three months before the December 2000 rate cut, the ripple effects of the dot-com bubble burst began to show, and then the United States entered a 2.5-year recession, during which the S&P 500 fell -50%;
** One month after the September 2007 rate cut, the United States subprime mortgage crisis officially broke out, and the financial crisis swept the world, with the S&P 500 falling as much as -58% in the following one and a half years;
**In the 10 months before the August 2019 interest rate cut, the S&P 500 fell by -20% in the fourth quarter of 2018 under the influence of the Sino-US trade friction, and the 2020 circuit breaker occurred six months after the rate cut.
At present, the market is widely expected to cut interest rates in September, "even if United States inflation rises again and the AI bubble leads to dollar outflows, the Fed will choose to cut interest rates to fill the capital outflow gap."
Fourth, the wave of yen carry trade
The yen rose as much as 1% against the dollar on Thursday to 148.51. The yen surged nearly 1.9% against the dollar on Wednesday, extending its monthly gains to more than 7%.
Strategists at Amundi and TD Securities believe that the yen could rise as high as 140 yen to 1 dollar against the dollar. Macquarie strategists also said that "the strong rally in the yen has just begun," and that the dollar could be close to 140 against the yen by the end of the year and rise to 125 by December 2025. This will bring the yen exchange rate back to the level of early 2022, when the Fed just started raising interest rates. ”
The Japanese yen rose above key levels against the US dollar, leading the global carry trade unwinding wave, pushing down currencies such as the Mexico peso, the Australian dollar and the New Zealand dollar.
The so-called yen carry trade refers to investors lending the yen, a low-interest currency, and then investing in assets in high-interest currencies, such as U.S. bonds, to obtain income in this way. However, with the Fed's successive interest rate hikes and the tightening of dollar liquidity, the cost of US dollar financing has increased, and at the same time, the cost of locking up foreign exchange against the US dollar has also increased, which makes the benefits of the yen carry trade no longer match the costs, causing many investors to start unraveling, that is, selling the assets they previously invested in and withdrawing their funds.
This kind of position splitting has had a certain impact on the global financial market. First, high-yielding assets such as U.S. bonds are facing selling pressure, which increases the upward pressure on U.S. Treasury yields in the short term.
Second, the cessation of the carry trade and the weakening of the power to buy U.S. Treasuries could lead to pressure on global asset valuations and increased downward pressure on equity and bond markets.
In addition, the cessation of the JPY carry trade also means a reduction in short positions in the JPY, which may have an impact on the JPY exchange rate.
Fifth, the Japan stock market is facing a technical bear market test
Following a 2.49% drop on August 1, the Nikkei 225 index fell more than 5% intraday on August 2. Following the correction of the high on July 11 this year, the Nikkei 225 index has fallen by nearly 6,000 points, with a cumulative maximum decline of nearly 15%. If the Nikkei 225 falls by more than 5%, it will face a technical bear market.
This time the Japan stock market fell sharply, the fuse was that the Bank of Japan launched a combination of "interest rate hike + balance sheet reduction". Although Japan's short-term interest rate was only raised to 0.25%, which is not a large increase, considering that Japan has been in a state of negative interest rates for a long time, this "interest rate hike + balance sheet reduction" measure has a greater impact on the risk appetite of market funds. This policy change, coupled with the unusually sustained appreciation of the yen, led to outflows from the stock market, further exacerbating the decline in Japan's stock market.
"The downward trend of the yen's appreciation and stock market is likely to continue, and the blow to corporate performance will be inevitable," analysts said, noting that "there is a clear inverse relationship between the yen and the Japan stock market, that is, the yen's continued appreciation has an impact on the diversion of funds to the Japan stock market."
6. Summary
In this wave of decline, the decline of Hong Kong stocks and A-shares was relatively small. Since October 2022, U.S. stocks have risen sharply, and China's capital market has continued to fall. For now, the seesaw effect of this money is likely to move in the opposite direction. China's solid performance of the real economy and the People's Bank of China's interest rate cut policy have also provided further support to the stock market, and it is expected that the low valuation advantage of China's stock market in the reallocation of global funds will be able to attract the attention of global funds.