Editor: Yang Yucheng, Securities China
Proofreading: Zhao Yan
Just now, the Japanese stock market experienced an epic plunge, with the Nikkei 225 index plummeting by nearly 7%. The Japan Topix Index triggered the circuit breaker mechanism and recorded the largest single-day drop in eight years. It also led to a plunge of more than 4% in the South Korean stock market. At the same time, the US dollar against the yen also plummeted, currently falling to around 145. The yield on Japan's 5-year government bonds also fell by 10 basis points to 0.475%.
It is worth noting that U.S. stock index futures continued to fall, with the Nasdaq 100 index futures falling by 2% and the S&P 500 index futures falling by more than 1%. The U.S. 2-year Treasury yield fell by 9 basis points to its lowest level since May 2023. The cryptocurrency market also saw a sharp drop across the board.
So, how long will this situation last?
No one had expected that the biggest victim of the Bank of Japan's interest rate hike would be the Japanese stock market. This morning, the Nikkei 225 index plunged more than 7%. The Tokyo Stock Exchange triggered a circuit breaker. The Tokyo Stock Exchange fell 20% from its July high. The Japanese banking index fell 12%, the worst performance among the Tokyo Stock Exchange's industry classification indexes. Mitsubishi UFJ Financial Group's stock price fell 21% at one point, setting a record intraday drop.
At the same time, the yen surged again, with USD/JPY falling to around 145. Japanese government bond futures triggered the circuit breaker mechanism.
Driven by the Japanese stock market, the Korean market also opened with a sharp drop of more than 4%, and Samsung's stock price fell by 5%, the largest drop since 2020. Kia Motors also fell by nearly 5%, and SK Hynix, Hyundai Motor, Cellun and other stocks fell by more than 3%. U.S. stock futures continued to fall, with the Nasdaq 100 index futures falling by 2% and the S&P 500 index futures falling by more than 1%. The yield on the U.S. 2-year Treasury bond fell by 9 basis points to the lowest level since May 2023. The U.S. dollar index fell to around 103.
Australia's S&P/ASX 200 index opened 2.3% lower on Monday. The Reserve Bank of Australia will begin a two-day monetary policy meeting on Monday. Economists polled by Reuters expect the central bank to keep interest rates unchanged at 4.35%, but the market will focus on the monetary policy statement to clarify whether the Reserve Bank of Australia is still considering raising interest rates.
Virtual currencies also fell across the board, with Bitcoin falling to around $58,000 per coin and Ethereum falling by more than 7%. In the past 24 hours, a total of 109,527 people were liquidated, with a total liquidation amount of $360 million.
So, how long will this turmoil last?
From the perspective of events, the global sell-off was caused by the reversal of yen arbitrage on the one hand. On the other hand, it may also be related to the turbulent situation in the Middle East. First, let's look at the reversal of yen arbitrage. A financial historian believes that the main driving force of the global market is the yen exchange rate, and this trend should attract the attention of those who "focus entirely on domestic dynamics in the United States to evaluate price results."
The yen has gained about 8% against the dollar over the past month, trading at 148.84 yen on Friday and around 145 yen this morning. This is in stark contrast to the run-up to the July 4 holiday in the U.S., when the yen fell to 161.96 yen per dollar for the first time since December 1986. The speed of the yen’s rise caught many market participants off guard.
The yen's appreciation has sparked speculation about whether it marks the end of the popular so-called "carry trade," in which investors borrow in low-interest currencies such as the yen and reinvest the proceeds in currencies with higher returns. U.S. stocks are clearly vulnerable to a stronger yen, and changes in Japan's monetary policy are having serious consequences for U.S. asset prices and those across the developed world.
Russell Napier, co-founder of investment research portal ERIC, said that in the case of financial repression, this negative reaction in US stock prices will be exacerbated because investors in carry trades will be forced to sell, and at the same time, Japanese financial institutions will be forced to sell stocks in accordance with the requirements of Japanese authorities to buy (Japanese government bonds). With the yen being severely undervalued and Japan's imminent need for financial repression, investors should not expect US stock valuations to continue to rise when such a change comes.
Napier said the yen's behavior in recent weeks and its impact on U.S. stock prices provide some early warning indicators that the U.S. will have a hard time maintaining an unsustainable situation when foreign investors are entering a period of repatriation, a trend that could last for more than a decade.
On the other hand, the situation in the Middle East may also be brewing as a risk factor. After Hamas leader Haniyeh was killed in an attack in Tehran on July 31, the situation in the Middle East continued to be tense. Many airlines announced the cancellation of flights to Beirut, Lebanon, and many countries urged their citizens to leave Lebanon as soon as possible. On August 4, the Beirut Airport in Lebanon was busy, with many passengers preparing to leave by plane. Lufthansa, Swiss International Air Lines, Air France and other airlines have announced the suspension of flights in and out of Beirut, the capital of Lebanon.
According to Huanqiu.com, Axios News Network quoted three US and Israeli officials on the 4th that Iran will attack Israel as early as Monday (August 5). In recent days, the call for "revenge" has dominated the Iranian media. Qatar's Al Jazeera said that Iran seeks to restore deterrence against Israel without triggering a full-scale war in the region. As the situation deteriorates, the United States, Britain, France and other countries have called on their citizens in Iran to "leave as soon as possible."
