After experiencing a sharp plunge, most global stock markets bounced back on August 6th following the previous day’s turmoil. Tokyo’s stock market, in particular, saw a historic surge after opening, with the Nikkei index closing at 34,675 points, an increase of over 3,200 points. Midday, it even surged over 3,400 points. Prior to this, the Nikkei index had seen a significant decline over three consecutive trading days, with a total drop of over 7,600 points.
On August 2nd, data released in the U.S. revealed that the July non-farm payrolls fell short of expectations, along with lower-than-expected earnings reports from several American high-tech companies, leading to selling pressure in the stock market. Additionally, the Bank of Japan announced a rate hike at a time when the interest rate differential between the U.S. and Japan narrowed, triggering a global arbitrage trade “great unwinding”, coupled with escalating geopolitical risks in the Middle East, creating turbulence in global stock markets.
Several economic experts analyzed by Dajiyuan expressed their opinion that although there are concerns in the market about a potential collapse similar to the dot-com bubble burst in 2000, the current economic data indicates that the U.S. stock market is experiencing volatility within an adjustment range, making it difficult to determine if the U.S. economy is heading towards a recession.
The U.S. Bureau of Labor Statistics reported an increase in the unemployment rate to 4.3% in July, causing the three-month moving average of this indicator to surpass the 12-month low point by 0.5 percentage points. This triggered the so-called “Sahm Rule”, indicating a potential recession in the economy. However, Sahm Claudia, the creator of the rule, mentioned on Bloomberg TV that it is not yet likely that the economy is in a recession but the situation is moving dangerously close.
Sahm, the Chief Economist at New Century Advisors and a former economist at the Federal Reserve, emphasized that although the Federal Reserve is cautious, it will act when necessary and do what is required in response to changing circumstances.
Taiwanese economist Wu Jialong pointed out that the Sahm Rule is based on experiential data from the past 65 years and does not account for factors like pandemics. This distortion caused by the pandemic in the U.S. job market might render the Sahm Rule ineffective this time.
The shocking rise in the unemployment rate to 4.3% and other disappointing employment figures in the U.S. July report led to concerns in the market about a possible economic recession. Additionally, the earnings reports of several high-tech companies falling below market expectations on August 2nd were also a contributing factor to the sharp decline in the U.S. stock market in recent days.
One such example was Intel, reporting second-quarter revenue of $12.83 billion, slightly below analysts’ consensus of $12.94 billion, marking a 0.9% year-on-year decrease. Intel announced layoffs exceeding 15% and suspending dividend distributions in the fourth quarter to maintain competitiveness, leading to a more than 20% drop in their stock price.
Furthermore, financial reports from tech giants like Microsoft, Amazon, Tesla, and Google’s parent company, Alphabet, also disappointed investors. Despite Apple’s earnings surpassing expectations, there were concerns in the market about overvaluation of certain tech stocks.
Economic scholars like Mike Sun from the North American Investment Advisors highlighted that the substantial investment in AI technology stocks in recent years without immediate returns led to investors losing patience and withdrawing funds, fearing a repeat of the dot-com bubble burst in 2000.
Amidst the U.S. stock market turmoil, Warren Buffett’s Berkshire Hathaway disclosed selling nearly half of its Apple holdings in the second quarter. This move reduced the value of their holdings to around $84 billion, down from approximately $140 billion at the end of March, boosting Berkshire’s cash reserves to a new historic record of $276.9 billion. This consistent selling of stocks by Buffett added to market panic, with some interpreting it as a bet on a U.S. economic recession.
Regarding Buffett’s actions, Wu Jialong believed that Buffett’s massive investment scale operates differently from individual retail investors. Buffett’s stock movements require time and may not always be accurate. For instance, after Buffett sold shares of TSMC, the stock soared. Therefore, Buffett’s continuous selling should be interpreted as a market trend analysis, rather than a signal of a U.S. recession.
Li Hengqing also noted that Buffett excels in long-term strategic investments, and his recent market fluctuations, continuous selling, and increasing cash holdings may indicate waiting for new investment opportunities, rather than pessimism towards the U.S. economy. With escalating tensions in the Middle East, often leading to safe-haven investments in the U.S., Li doubts a major recession will occur in the U.S. in the near future.
In the midst of global stock market volatility, on July 31st, the Bank of Japan announced a rate hike to 0.25%. Previously in March, the Bank of Japan had raised rates to 0% to 0.1%. This marked the first instance in 17 years where the Bank of Japan consecutively raised rates in two meetings.
The timing of the rate hike by the Bank of Japan overlapped with signals from the Federal Reserve hinting at a September rate cut, resulting in a rapid surge in the Japanese Yen against the U.S. dollar. On July 29th, 1 USD equaled 154 JPY, rising to 143 JPY by August 5th, a sharp increase of over 1,000 points in just five trading days.
Traders in the Japanese market stated that the significant appreciation of the Yen triggered a massive retreat in global forex arbitrage trading, an unavoidable subject amidst the global stock market plummet.
Market traders mentioned that investors previously borrowed cheap funds in Yen to invest in high-yield markets as a way to profit. With the Bank of Japan announcing a rate hike, these investors not only faced losses in their high-yield assets (such as U.S. stocks) but also incurred losses due to the rise in the Yen exchange rate upon closing their trades. This dramatic reversal sparked a “great unwinding” of global arbitrage trading.
Peter Schiff, Chief Market Strategist at the Europe Pacific Asset Management Company, highlighted in a recent article over the weekend that the almost-ending opportunity for investors to borrow at no cost had led them to unwind Yen carry trades, intensifying volatility in the forex and other markets.
Schiff mentioned that this could potentially impact global markets, with Yen volatility causing trouble for leveraged bets, possibly triggering a wave of additional margin calls and further global sell-offs.