Since last week, there has been some rumors in the overseas equity market.
On the one hand, U.S. stocks fell across the board due to a weak jobs report, and at the same time, there was bad news, and Warren Buffett rarely reduced his position in Apple, the largest holding; On the other hand, after the Bank of Japan raised interest rates more than expected in order to save the exchange rate, Japanese stocks suddenly collapsed, and the Nikkei 225 fell nearly 6% on Friday, and today it twice crashed 12.4%.
On Monday, the global market was hurt by indiscriminate AOE - European stocks opened sharply lower; China's Taiwan Stock Exchange weighted stock price index closed down 8.4%, the largest one-day decline in history; The Korea Composite Index closed down 8.8%, also triggering a circuit breaker. (Source: Wind)
When the record of "Black Monday" in October 1987 was broken again, it has to be said that we witnessed history again.
What happened? Why is the global market shaking? How do you view the adjustment level of U.S. stocks? And how will it affect investment? Next, dig the base belt and you have a good look.
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What happened? Why is the global market shaking?
First, the market began to trade the "recession narrative" of the United States economy.
United States new non-farm payrolls cooled significantly in July (+114,000 this month, +206,000 last month), and the unemployment rate of 4.6% hit a new high in nearly three years, coupled with the ISM manufacturing PMI data significantly lower than expected, exacerbating market concerns about a recession and a "hard landing" in the United States.
The financial community over the weekend was buzzing that the current state of employment in United States has triggered the famous Sahm Rule.
This indicator was proposed by former Fed economist Claudia Sahm to predict a recession. The law states that a recession can begin when the three-month moving average of the United States unemployment rate rises by more than 0.5 percentage points from its lowest point in the past 12 months.
This rule has been 100% accurate since the 1970s, but the July employment data report showed that the threshold defined by Sam's Law had reached 0.53%, causing panic in overseas markets.
Second, there are signs of reversal in the carry trade in the international foreign exchange market.
As one of the most common investment strategies in the world, the core of the yen carry trade is that Japan has maintained zero interest rates for a long time, and funds can borrow the low interest rate advantage of the yen, exchange it for other high-interest currencies, such as the US dollar, and then invest in high-yielding US stocks to earn interest rate differentials. Of course, in this round of trading trends, there may also be a layout of carry funds on Japan trading company stocks.
But the success of this strategy is inseparable from the support of three key conditions.
First, Japan's interest rates on the debt side need to remain low; secondly, the yen exchange rate is biased towards depreciation; Finally, U.S. stocks and "daily valuation" stocks can continue to rise.
However, in the past two weeks, the yen carry trade has reversed. On the one hand, the financial performance of some U.S. technology stocks slowed down in the second quarter, and the market was worried about the decline in future performance, triggering a sharp decline in the stock price of a leading company; On the other hand, the Bank of Japan raised interest rates more than expected, and the yen appreciated sharply.
The reason behind this is not difficult to understand, after all, in the current state of crowded trading, the slightest wind and grass can lead to the panic collapse of the huddled funds, and then there will be a sharp decline in US stocks and Japanese stocks and the reverse trading of the yen.
Reference Sources:
"United States July Non-Farm Payrolls Data and Sam's Law", GF Macro, 2024.8.3
A Shares: Is It Down? Or is it an independent market? SDIC Securities Strategy, August 4, 2024
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How do you view the adjustment level of this round of U.S. stocks?
When the crux of the problem has become clear, the market begins to focus on the performance of US stocks in the future.
In the past 30 years, the five rounds of large-scale adjustments experienced by U.S. stocks have either been due to the macroeconomic environment getting out of control or a "hard landing"; Either it's a sudden, extreme risk event shock.
The first time was in 2000, when the tech bubble burst, with the S&P 500 with a maximum drawdown of 48% and the Nasdaq with a maximum drawdown of 73%;
The second was in 2008, when the subprime mortgage crisis broke out, with the S&P 500 with a maximum drawdown of 56% and the Nasdaq with a maximum drawdown of 55%;
The third time was in 2018, when the Fed raised interest rates + the United States economy slowed down, with the S&P 500 retracement of 20% and the Nasdaq retracement of 23%;
The fourth time was in 2020, when the overseas epidemic broke out, the S&P 500 had a maximum drawdown of 34%, and the Nasdaq had a maximum drawdown of 30%;
The fifth time is in 2022, when United States inflation is out of control + interest rate hike expectations are interpreted, with the S&P 500 retracement of 25% and the Nasdaq retracement of 34%.
The Zheshang strategy team believes that the current situation of U.S. stocks is that there is no event impact, second, although the economy has begun to weaken, the expectation of interest rate cuts has been strengthened, and third, inflation has cooled.
Against this backdrop, the pullback in U.S. equities is mainly due to the revision of previous high expectations and a reaction to the recent weakening of the United States economy, while seasonal factors (the August-September earnings season for U.S. stocks is usually more volatile) also affected the market to some extent.
It is expected that the current round of correction in U.S. stocks may be more of a wide range than a deep decline, but the resumption of the rally will still need to wait for a significant improvement in economic data.
Reference Sources:
"Several Focus Issues on the Adjustment of U.S. Stocks", Zheshang Securities Strategy, August 4, 2024
3►
How does it affect A-shares and investment, and what does the market look like in the future?
In the short term, the impact of the reversal of overseas carry trades on A-shares may focus on the following two transmission paths.
The first is the RMB exchange rate and the phased market performance of A-shares. As the interest rate gap between China and the United States narrowed, funds withdrew from the dollar, catalyzing the sharp appreciation of the yuan along with the yen, and the onshore USD/RMB exchange rate approached 7.11 at the lowest. (Source: Wind)
Although the path of northbound capital repatriation remains to be seen, judging from the historical data of mainstream broad-based indices, the CSI 1000 has the strongest negative correlation with the RMB exchange rate.
The second is the trend of U.S. AI in the A-share mapping sector. Nvidia chain and fruit chain are anchored to the stock prices of Nvidia and Apple respectively, and when the U.S. stock market leader adjusts, it may trigger a phased resonance retracement. (The above does not constitute a recommendation of individual stocks)
In the medium term, the logic that needs to be paid more attention to is the opening of the current round of the Fed's interest rate cut cycle.
According to CME's "Fed Watch": the probability of a 25 basis point rate cut by the Fed in September is 30.5%, and the probability of a 50 basis point rate cut is 69.5%; The probability of a cumulative rate cut of 75 basis points by November is 4.1%, the probability of a cumulative rate cut of 100 basis points is 35.8%, and the probability of a cumulative rate cut of 125 basis points is 60.1%.
Referring to the summary of Huatai Securities, in the nine rounds of the Fed's interest rate cut cycle since the 70s of the last century, from the mean and median, among the major types of assets:
Gold > global equity (growth> value, developed > emerging), > bonds (U.S. bonds> China bonds> European bonds> Japanese bonds) > other commodities (crude oil> copper, aluminum) > dollars.
Of course, if you separately count the performance of major types of assets in the time windows of 6 months, 3 months, 2 months, and 1 month before and after the Fed cuts interest rates, you can find that the performance of major types of assets varies according to the different economic environments in which the United States started to cut interest rates.
- If it is a defensive rate cut similar to 1995 and 2019, that is, the interest rate cut cycle is not long + the cumulative range is not large, then:
(1) Gold and bonds have the advantage before the interest rate cut, and there is pressure to cash out after the interest rate cut;
(2) The U.S. dollar is running strongly before and after the interest rate cut;
(3) There are upward windows before and after interest rate cuts in the equity market, showing the rotation law of U.S. stocks→ European stocks → emerging markets;
(4) The initial style of interest rate cut is not obvious, and the growth begins to significantly outperform after 3 months of interest rate cut.
- If it is a recession-style interest rate cut similar to 2001, that is, the interest rate cut cycle is long + the cumulative range is large, then:
(1) Gold fell before the rate cut and rose after the rate cut, which is a mirror image of the US dollar;
(2) Bonds are repeated from 1 month before the rate cut to 3 months after the rate cut, and the rate rises after 3 months of the rate cut;
(3) The equity market weakened in the short term before and after the interest rate cut, and after three months of interest rate cuts, the effect of interest rate cuts appeared and the numerator side improved.
- If it's a crisis-style rate cut like 1998, then:
(1) Gold began to strengthen one month before the interest rate cut;
(2) The US dollar began to decline in the first three months of the interest rate cut, and the decline before and after the rate cut was the largest;
(3) Bonds performed better from 3 months to 1 month before the interest rate cut, and began to perform differentially one month before the interest rate cut;
(4) Equity markets usually fall first and then reverse before and after interest rate cuts, and emerging markets perform stronger.
Reference Sources:
"The Impact of the Reversal of Carry Trade on A-shares", CITIC Futures, July 27, 2024
"Interest Rate Cut Cycle Review Series: Major Asset Categories", Huatai Research, August 2, 2024
Overall, sell-side researchers still tend to believe that this round of Fed is more akin to defensive rate cuts, that is, the United States economy has actually started a recession, but the probability of a "soft landing" is relatively large.
But in the crowd of carry trades, in the short-term collapse of faith, and the rumors that global funds are pricing in recession-style rate cuts, excessive panic is already evident.
For investment, the short-term market is indeed a bit confusing, but, as the United Kingdom poet Milton said, "Order arises from chaos." ”
The world is indeed in flux, but everything is not as complicated as imagined. For most investors, when the market trend is uncertain, it may be the right time to consider asset allocation and regular investment, and not to waste a "crisis".
Buying multiple times within a reasonable proportion of assets to reduce the risk of timing is expected to gradually reap the results when the desired target rate of return is reached, and then start a new round of investment cycle.
Risk Warning
The views expressed in this material are for informational purposes only and are not intended as any legal documents, and all information or opinions expressed in the materials do not constitute final operational advice on investment, legal, accounting or taxation, and we do not make any warranties for the final operational advice regarding the content of the materials. Under no circumstances shall the Company be liable to any person for any loss arising from the use of any content in this material. The above content does not constitute a recommendation of individual stocks. The past performance of the Fund and its net worth are not indicative of its future performance, and the performance of other funds managed by the Fund Manager does not constitute a guarantee of the performance of the Fund. The Manager does not guarantee profitability and does not guarantee a minimum return. Investors should fully understand the difference between regular and fixed investment of funds and savings methods such as small deposits and withdrawals. Regular investment is a simple and easy way to guide investors to make long-term investments and average investment costs. However, regular investment does not avoid the inherent risks of fund investment, does not guarantee investors to obtain returns, and is not an equivalent financial management method to replace savings. The market is risky, and you should be cautious when entering the market.