Global Stock Market Turmoil: U.S. Stock Futures Paused, Panic Spreads in Japanese and South Korean Markets

Author: Chen Zhi, 21st Century Business Herald

Editor: Zhou Yanyan, 21st Century Business Herald

The panic from the sharp declines in Japanese and South Korean stocks has spread to the European and American markets. On the afternoon of August 5, several brokerage firms announced that trading in the night session had been suspended due to abnormalities in the upstream system of the U.S. stock market night trading.

U.S. Stock Market Night Trading Suspended! Brokerages Urgently Notify

Futu Holdings stated, "Dear customers, due to abnormalities in the upstream system of the U.S. stock market night trading, today's night session has been suspended. This affects most brokerages that provide night trading services. We are in contact with the upstream for communication, and we apologize for the inconvenience caused." Tiger Brokers also notified investors, stating, "Due to system abnormalities at the U.S. stock market exchange, today's night session has been suspended. It is understood that all brokerages supporting night trading are affected. We are in contact with the exchange for communication. We sincerely apologize for the inconvenience caused." According to Watcher.Guru, Robinhood has also suspended 24-hour trading.

Major Tech Stocks Decline Before Market Open

On August 5, S&P 500 futures expanded their decline to a low point during the session, down 3.3%.

NVIDIA's pre-market decline expanded to 13%. Reports indicate that the launch of the company's new AI chip has been delayed, and the overall market is generally declining.

Other trillion-dollar tech stocks are also falling, including Apple, Amazon, Microsoft, Google's parent company Alphabet, and Facebook's parent company Meta Platforms. Tesla's stock price also dropped over 10% before the market opened. These seven stocks collectively account for about 43% of the Nasdaq 100 index weight.

Spot Silver and Gold Continue to Decline

On August 5, spot silver continued to decline, with a drop of over 6.8%, reported at $26.59 per ounce; spot gold's decline expanded to 3%, reported at $2367.5 per ounce.

Multiple Countries Respond to Market Turmoil

According to Shanghai Securities News, after the stock market's violent fluctuations, officials from multiple countries have responded.

On Monday, Japan's Finance Minister Shunichi Suzuki expressed strong concern over the stock market decline. He stated that stock prices are determined by the market, and it is important for the government to make decisions calmly.

Shunichi Suzuki said it is difficult to say what the underlying reasons for the stock market decline are. He added that the government is cooperating with the Bank of Japan (BOJ) and will continue to closely monitor the market, paying attention to foreign exchange market trends. He declined to comment on whether the current yen level is considered too high. Shunichi Suzuki stated that foreign exchange rates should ideally fluctuate in a stable manner and reflect economic fundamentals.

South Korean regulators also made several comments to soothe investor sentiment, with the South Korean Ministry of Finance stating that it will respond to the intensified market volatility according to an emergency plan. The South Korean regulators also stated that today's stock market decline is "excessive," and they will closely monitor the foreign exchange and stock markets, taking swift market stabilization measures if necessary.

Thailand's Finance Minister stated on Monday that Thailand will expand its government stock fund in October to support the stock market, adding that the market decline is due to external factors.

On Monday, Thailand's main stock index fell by 2.93%, reaching its lowest point since early November 2020, influenced by a global market sell-off driven by concerns over a U.S. economic recession. The Thai Finance Minister previously stated that the government investment in the stock fund will increase by 100 billion baht to 150 billion baht.

Japan's "Black Monday": Massive Liquidation of Overseas Capital

On August 5, the Japanese stock market experienced a "Black Monday."

By the close of the day, the Nikkei 225 index closed at 31,078 points, down 13.46%, with the maximum intraday decline exceeding 15%. By the close, the Nikkei 225 index had essentially erased all gains made this year.

According to interviews conducted by the 21st Century Business Herald, industry insiders believe that the reasons for Japan's stock market experiencing "Black Monday" are influenced by multiple factors: First, the Bank of Japan's interest rate hike and balance sheet reduction measures last week led the market to lower the growth outlook for Japanese export companies, triggering a wave of profit-taking;

Second, escalating conflicts in the Middle East may have prompted previously invested Middle Eastern capital in the Japanese stock market to rapidly withdraw and return to their home countries;

Third, the weak U.S. non-farm payroll data for July raised concerns about a hard landing for the U.S. economy, leading to a corresponding decline in investment confidence in the Japanese stock market;

Fourth, the significant declines in European and American stock markets last Friday may have led some European and American investment institutions to repatriate funds to "offset" margin calls for leveraged investment portfolios in Europe and the U.S. Several emerging market investment fund managers told reporters that another significant capital force behind the sharp decline in the Japanese stock market is the large-scale "liquidation" of overseas capital engaged in reverse yen carry trades.

Why is Overseas Capital Keen on Reverse Yen Carry Trades?

According to reporters from the 21st Century Business Herald, influenced by the Bank of Japan's continued extremely loose monetary policy, there are two major yen arbitrage trades in the financial market. First, local Japanese investors first borrow low-interest yen to amplify investment leverage, then convert yen into U.S. dollars and other foreign currencies to invest in overseas high-yield bonds or stocks, seeking substantial interest rate spread returns;

Second, an increasing number of overseas investment institutions are also borrowing low-interest yen to amplify investment leverage, then reinvesting in the Japanese stock market, betting on profits from the rise of the Japanese stock market and the appreciation of the yen. Since the latter's capital flow is entirely different from that of local Japanese investors' yen carry trades, it is referred to in the financial market as "reverse yen carry trades." Due to Japan's continued economic recovery (escaping economic deflation) and the increased strength of dividend repurchases by Japanese listed companies, more and more overseas capital has adopted the reverse yen carry trade model, increasing their positions in Japanese stocks in anticipation of a rise in the Japanese stock market.

Especially since stock guru Warren Buffett has issued yen-denominated bonds to finance and then bought Japanese stocks at a low price for substantial returns, overseas capital has become even more eager for reverse yen carry trades.

Several emerging market investment fund managers candidly stated that since last year, during the significant rise of the Japanese stock market, the amount of overseas capital flowing into the Japanese stock market accounted for over 30% of the total inflow into the Japanese stock market, with a considerable proportion of overseas investment funds coming from reverse yen carry trades. Behind this is the characteristic of reverse yen carry trades that allows "small bets to win big," meaning that overseas capital can achieve high capital leverage with relatively low interest expenses, thereby significantly amplifying investment scale and obtaining higher returns from the rise of Japanese stocks.

A foreign exchange broker revealed to reporters that another important reason for the prevalence of reverse yen carry trades is that many overseas capital players are optimistic about the future appreciation of the yen. Although the yen has been depreciating against the U.S. dollar since last year due to the Bank of Japan's continued extremely loose monetary policy, overseas capital believes that the Bank of Japan will eventually tighten its monetary policy, leading to a significant rise in the yen exchange rate, thus providing substantial returns for reverse yen arbitrage trades.

"Since the end of last year, as the yen has continued to depreciate against the U.S. dollar, even briefly falling below the 160 mark, overseas capital has adopted a strategy of buying more as prices fall—meaning that the lower the yen exchange rate, the more they convert U.S. dollars into more yen (or borrow more low-interest yen) and buy Nikkei 225 index ETFs, waiting for the harvest season of yen appreciation." he pointed out.

Now, under the resonance of the Bank of Japan's significant interest rate hikes and balance sheet reductions, the weak U.S. non-farm payroll data raising concerns about a 50 basis point rate cut by the Federal Reserve in September, and the ongoing escalation of tensions in the Middle East, the yen has risen sharply from around 161 in early July to approximately 142.85 against the U.S. dollar, prompting overseas capital to see substantial returns from reverse yen carry trades, leading to a massive sell-off of Japanese stocks and conversion of yen into U.S. dollars, reaping huge exchange rate gains.