Just now, an epic crash has arrived

Editor: Yang Yucheng, Securities China
Proofreader: Zhao Yan

Just now, the Japanese stock market experienced an epic crash, with the Nikkei 225 index plummeting nearly 7%, and the Tokyo Stock Exchange index triggering a circuit breaker, marking the largest single-day drop in eight years. This also led to a more than 4% plunge in the South Korean stock market. Meanwhile, the dollar against the yen also fell sharply, currently dropping to around 145. The yield on Japan's 5-year government bonds also decreased by 10 basis points to 0.475%.

It is noteworthy that U.S. stock index futures continued to decline, with the Nasdaq 100 futures falling by 2%, and the S&P 500 futures dropping over 1%. The yield on U.S. 2-year government bonds fell by 9 basis points, reaching the lowest level since May 2023. The cryptocurrency market also saw a widespread crash.

So, how long will this situation last?

Venting

No one expected that the Bank of Japan's interest rate hike would be the biggest victim of the Japanese stock market. This morning, the Nikkei 225 index once plummeted over 7%. The Tokyo Stock Exchange index triggered a circuit breaker to the downside. The Tokyo index has fallen 20% from its peak in July. The Japanese banking index dropped 12%, performing the worst among the industry classification indices on the Tokyo Stock Exchange. Mitsubishi UFJ Financial Group's stock price once fell by 21%, setting a record for intraday decline.

At the same time, the yen surged again, with the dollar against the yen falling to around 145. Japanese government bond futures triggered a circuit breaker.

Driven by the Japanese stock market, the South Korean market also opened with a drop of over 4%, with Samsung's stock price falling by 5%, marking the largest drop since 2020. Kia Motors also fell nearly 5%, while SK Hynix, Hyundai Motors, and others dropped over 3%. U.S. stock index futures continued to decline, with the Nasdaq 100 futures falling by 2%, and the S&P 500 futures dropping over 1%. The yield on U.S. 2-year government bonds fell by 9 basis points, reaching the lowest level since May 2023. The dollar index fell to around 103.

The Australian S&P/ASX 200 index opened down 2.3% on Monday. The Reserve Bank of Australia will begin a two-day monetary policy meeting on Monday. Economists surveyed by Reuters expect the central bank to keep the interest rate 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 a rate hike.

Cryptocurrencies also saw a widespread sell-off, with Bitcoin dropping to around $58,000 per coin, and Ethereum falling over 7%. In the last 24 hours, a total of 109,527 people were liquidated, with a total liquidation amount of $360 million.

How Long Will the Turmoil Last?

So, how long will this turmoil last?

From the events, this global sell-off is partly due to the reversal of yen carry trades. 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 carry trades. A financial historian believes that the main driving force in the global market is the yen exchange rate, and this trend should attract the attention of those who are "completely focused on domestic U.S. dynamics to assess price outcomes."

In the past month, the yen has appreciated by about 8% against the dollar, trading at 148.84 yen per dollar on Friday, and this morning it rose to around 145 yen. This stands in stark contrast to the situation before the U.S. holiday on July 4, when the yen fell to 161.96 yen per dollar for the first time since December 1986. The speed of the yen's appreciation has caught many market participants off guard.

The appreciation of the yen has sparked speculation about whether this marks the end of the popular so-called "carry trade." Carry trade refers to investors borrowing low-interest currencies like the yen and then reinvesting the proceeds in higher-yielding currencies. Currently, U.S. stocks are clearly more susceptible to the rise in the yen exchange rate, and changes in Japanese monetary policy are indeed having severe consequences for U.S. asset prices and those of developed countries as a whole.

Russell Napier, co-founder of the investment research portal ERIC, stated that under financial repression, the negative reaction of U.S. stock prices will intensify, as carry trade investors will be forced to sell, while Japanese financial institutions will also be compelled to sell stocks as required by Japanese authorities to purchase (Japanese government bonds). Given that the yen is severely undervalued and Japan's imminent need for financial repression, investors should not expect U.S. stock valuations to continue rising as this change approaches.

Napier said that the recent movements of the yen exchange rate and its impact on U.S. stock prices provide some early warning indicators, suggesting that it will be difficult for the U.S. to maintain an unsustainable situation when foreign investors tend to repatriate capital, and this tendency may 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 attacked and killed in Tehran on July 31, tensions in the Middle East have continued to rise, with several airlines announcing the cancellation of flights to Beirut, Lebanon, and multiple countries urging their citizens to leave Lebanon as soon as possible. On August 4, Beirut's airport was bustling, with many travelers preparing to leave. Airlines such as Lufthansa, Swiss Air, and Air France have announced the suspension of flights to and from Beirut.

According to Global Times, U.S. Axios News quoted three U.S. and Israeli officials on August 4, stating that Iran may attack Israel as early as Monday (August 5). In recent days, calls for "revenge" have dominated Iranian media. Al Jazeera reported that Iran seeks to restore deterrence against Israel without triggering a full-scale regional war. As the situation worsens, the U.S., U.K., France, and others have called on their citizens in Iran to "leave as soon as possible."