【MACRO Alert】Global Markets Experience "Black Monday," Escalating Turmoil and Uncertainty!?

Global financial markets underwent a day of intense volatility on Monday, an event widely dubbed “Black Monday.” From Tokyo to New York, stock markets suffered significant losses, with investors flocking to safe-haven assets, making U.S. Treasury bonds their top choice. The Nikkei index plummeted by 12%, the South Korean Kospi fell by 9%, and the NASDAQ Composite Index dived by 6% within seconds of opening. The cryptocurrency market was not spared, with the Volatility Index (VIX) surging, reflecting the market's panic sentiment.

The extent to which this wild fluctuation signifies the end of global selling or heralds the beginning of a prolonged slump remains unclear. However, it is certain that a series of key assumptions that have underpinned financial market gains for years have been shaken. The robust growth of the U.S. economy, the rapid transformation of global business by artificial intelligence, and the Bank of Japan's loose monetary policy—expectations once taken for granted—are now facing severe trials.

The U.S. employment report for July was disappointing, and the quarterly earnings of major technology companies based on artificial intelligence were equally underwhelming. The interest rate hike by the Bank of Japan was another blow to market confidence. These factors, working in concert, have led investors to reassess risks, with the global stock market losing approximately $6.4 trillion in market value over just three weeks.

Market analysts and economists have differing views on this phenomenon. Some believe that despite the sharp market fluctuations, it does not necessarily mean an impending economic recession. For instance, economist Ed Yardeni compared the current market turmoil to the “Black Monday” of 1987, noting that although the market experienced a historic plunge at the time, the economy did not fall into a long-term recession. However, there are also opinions that the market adjustment may foreshadow deeper economic issues, with the bond market's movements being of particular concern.

The inverted yield curve of the two-year and ten-year U.S. Treasury bonds is typically seen as a harbinger of economic recession. Market expectations for a Federal Reserve rate cut have rapidly intensified, with traders betting that the U.S. economy may be on the brink of rapid deterioration. Against this backdrop, investors and analysts are looking for bottom signals in the market. Quincy Krosby of LPL Financial noted that the market is experiencing a liquidation of long positions while paying attention to the Federal Reserve's policy direction and signs of economic growth. Callie Cox of Ritholtz Wealth Management warned that if the Federal Reserve fails to recognize the cracks in the job market in time, it may lose control of the economy.

Despite the market's sharp adjustments, some analysts believe this may be the result of an overreaction by the market. Seema Shah of Principal Asset Management believes that concerns about economic weakness may be overblown, and that a sustained market recovery requires a series of catalysts, including the stabilization of the yen, strong earnings data, and reliable economic data releases. Amid this global market turmoil, investors' sentiments and strategies are also constantly changing. Some analysts believe that the market may have approached an opportunity to buy on the dip, but whether a strong rebound will occur still requires observation of future macro data. J.P. Morgan's trading department stated that the rotation of technology stocks may have essentially been completed, and the market may be approaching a tactical buying opportunity.

Overall, although the market may experience fluctuations in the short term, the fundamentals of the stock market remain attractive in the long term. As Keith Lerner of Truist Advisory Services pointed out, despite the possibility of market corrections, the long-term return potential of the stock market still exists. Investors need to remain rational when facing the current market turmoil, carefully analyze market dynamics, and make decisions based on personal risk tolerance and investment objectives.

Mary Daly, President of the Federal Reserve Bank of San Francisco, stated in a discussion co-hosted by the Hawaii Executive Collaborative that the labor market is currently experiencing a slowdown but has not reached a seriously weakened state. She pointed out that in the next few quarters, in order to maintain stable economic growth, the Federal Reserve may need to adjust policies, including rate cuts. Daly emphasized that despite signs of slowing down, the current job market remains solid, with companies reducing new recruitment but not laying off employees on a large scale.

Daly's remarks came after the release of the U.S. non-farm employment report last Friday, which fell short of expectations, intensifying market concerns about an economic recession and triggering a sharp decline in global stock markets. However, like other Federal Reserve officials, Daly warned the market not to overreact to the employment data of a single month. Charles Evans, President of the Federal Reserve Bank of Chicago, echoed this view in his speech on Monday, believing that economic growth is still at a stable level, and although the phenomenon of consumer arrears is worth paying attention to, the overall economic situation remains robust.

In addition, Daly noted that after the release of the employment report, the decline in mortgage interest rates reflected the effectiveness of the Federal Reserve's communication policy and the timeliness of policy adjustments. Despite the global stock market being hit hard, traders and investors called on the Federal Reserve to take more rapid and proactive actions, but Federal Reserve officials seem not to be affected by market sentiment.

At the same time, some economists, including analysts from Citigroup, JPMorgan Chase, and Wells Fargo, predict that the Federal Reserve will cut rates by 50 basis points at the September and November meetings, respectively. UBS even expects that the Federal Reserve may cut rates by 100 basis points this year, higher than previous forecasts. UBS stated in its report that unless the employment report for August is exceptionally strong, it is expected that the Federal Reserve will start the easing cycle in September. On the other hand, Bank of America believes that the Federal Reserve currently does not need to undertake a large-scale rate cut to deal with an economic recession.

Bank of America's securities brokerage team stated in its report that although the unemployment rate in July rose, this was mainly due to temporary layoffs, and it is expected that the employment situation in August will improve. They believe that as long as the layoff rate remains at a low level, the United States is unlikely to experience an economic recession. Bank of America expects that the rate cut cycle will start in September, with a rate cut of 25 basis points per quarter, until reaching a terminal rate of 3.25%-3.5% by mid-2026.

As the global market experiences intense fluctuations, investors should remain calm, focus on the fundamentals of the economy and policy trends, and prudently assess their own risk tolerance to find opportunities and avoid risks amidst market uncertainty. As pointed out by Federal Reserve officials, despite signs of slowing down, the job market remains solid, indicating that the economy has inherent resilience and recovery power. Let us step forward steadily to meet every possibility of the future and seize new opportunities.