In early August, a storm swept through the global stock markets. Due to the unexpected interest rate hike by the Bank of Japan, which triggered the closing of yen carry trades, coupled with market concerns over rising unemployment rates in the United States leading to recession fears and the tense geopolitical situation in the Middle East, the global stock markets experienced "Black Friday" (August 2nd) and "Black Monday" (August 5th). Particularly on August 5th, the stock markets in Japan and South Korea plummeted significantly, with multiple indices triggering circuit breakers.

However, after positive statements from regulatory authorities in various countries, a reduction in carry trade positions, and the release of positive data signals from the United States, the market's panic has gradually been repaired. As of August 15th, the indices of the stock markets in Japan and South Korea, which had experienced significant shocks, have essentially returned to levels prior to the sharp declines.

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On August 14th, the U.S. Department of Labor released the Consumer Price Index (CPI) data for July, which showed a month-on-month increase of 0.2%, with the core CPI also growing by 0.2%. China Merchants Securities described this data set as "just right," stating that it "met market expectations, neither changing the market's expectation for a rate cut in September nor intensifying concerns about an economic recession."

Integrating the viewpoints of several domestic and foreign institutions, in addition to the aforementioned factors, another significant influence on this global stock market turmoil is that overseas assets, being at high levels and crowded in trading, have seen short-term capital deleveraging amplify the volatility. A "soft landing" for the U.S. economy remains the basic assumption, and many institutions are inclined to view this "earthquake" as an opportunity for medium to long-term positioning.

"The most intense phase of overseas asset price fluctuations may have passed, with some aftershocks possible but no further significant declines expected," said a QDII fund manager in Shanghai, who remains optimistic about the medium to long-term performance of overseas assets, including U.S. stocks and bonds. "Overseas technology stocks have been hit the hardest in this round, and after adjustment, they may be a good choice for allocation."

Some institutions also believe that this adjustment will lead to a rebalancing of assets within the U.S. stock market. "The recent significant fluctuations in large-cap growth stocks in the United States have highlighted the high valuation risks faced by these behemoths, which were previously overlooked by the market. It is expected that investors will be more cautious about large-cap growth stocks in the future and will also seek other opportunities in the market," said Jiang Xianwei, Senior Global Market Strategist at J.P. Morgan Asset Management China, to Caijing, suggesting that this could lead to an opportunity for a redistribution of overall U.S. stock market valuations.

What impact might the A-share market experience in the midst of this global market volatility? There is a significant divergence of views among institutions. Optimists believe that the global stock market fluctuations could lead some risk-averse funds to flow into A-shares, which are valued lower. Pessimists, on the other hand, argue that under the expectation of a recession, all equity assets will be impacted. If a more extreme liquidity shock occurs, it could trigger indiscriminate asset sales.

"The recent amplification of overseas asset price fluctuations, while the A-share market has fully priced in the economic weakening since the second quarter, has maintained relative stability in the face of drastic external changes. In the medium term, the certainty of further easing by overseas markets and the strengthening of domestic growth policies is strong, with the market's upward potential outweighing the downside risks, and one should actively take long positions," said a person in charge at Bosera International to Caijing."In China's stock market, the importance of internal factors is becoming increasingly prominent. The implementation of policies and the stability of the real estate market are key to influencing market confidence," said Liu Jinjin, Chief Equity Strategist for Goldman Sachs China, to Caijing.

CICC believes that "significant fluctuations in overseas markets usually lead to emotional resonance, and extreme liquidity shocks may even trigger indiscriminate asset sales."

On August 23rd local time, Federal Reserve Chairman Jerome Powell made a clear statement at the annual meeting of the world's central banks that "the time has come to adjust policy." This is the strongest signal of interest rate cuts released by the Federal Reserve so far. The industry generally expects that the Federal Reserve's interest rate cut in September this year has become a high probability event.

With the expectation of interest rate cuts heating up, U.S. stocks have seen a significant rebound, and gold prices have also risen sharply, breaking through $2515 per ounce. The US dollar index has seen a significant decline, breaking below the 100-point mark.

Yang Delong, Chief Economist at Qianhai Open Source, expects that with the expectation of the Federal Reserve's interest rate cuts heating up, the possibility of high volatility in U.S. stocks is relatively large. In contrast, the current A-shares and Hong Kong stocks are in a historical bottom area and belong to the valuation lowlands of the global capital market. When the stock markets in Europe, America, and Japan are in a high position, some funds will take profits in advance and look for new valuation lowlands, which also brings certain opportunities to A-shares and Hong Kong stocks.

Global market shocks

Although two weeks have passed, the shocks in the global stock market on August 5th still left an indelible shadow in the hearts of many investors.

"On August 5th, near noon, I saw many people on social media saying that the Japanese stock market circuit breaker was triggered. I thought it was a P-picture until I checked the stock software to believe it. The Japanese stock ETF I bought fell by 9% that day, and this lesson may be remembered for a long time." An individual investor followed the trend in the first half of the year to buy many cross-border ETFs, and after the global stock market rebounded on August 6th, he cleared all the cross-border ETFs in his hand, and this investment ended in a loss.

In the "Black Monday" suffered by many global stock markets, the Japanese stock market fell the most severely.

On August 5th, the Nikkei 225 index fell by 12.40%, the largest single-day drop since 1987; the Tokyo Stock Exchange index fell by 12.23%, making all the gains since 2024 return to zero; futures trading of the Nikkei 225 index and the Tokyo Stock Exchange index once triggered the circuit breaker mechanism; the South Korean KOSPI index fell by 8.77%, triggering the circuit breaker mechanism; the Singapore Straits Times index fell by 4.07%; the Australian ASX200 index fell by 3.7%; the New Zealand NZX50 index fell by 1.51%.On the same day in the European and American markets, the Euro Stoxx 50, Germany's DAX, the UK's FTSE 100, and France's CAC 40 all saw significant declines. The Turkish stock market triggered the market circuit breaker mechanism twice after opening. The three major U.S. stock indexes closed lower, with the Nasdaq Composite falling more than 6% at the beginning of the trading day and closing down 3.43%. Nvidia and Tesla saw declines of over 20%, and the total market value of the "Seven Sisters" of U.S. stocks evaporated by $1.3 trillion, accounting for 20% of the global stock market value wiped out that day. The sharp drop in U.S. stocks led to panic selling by retail investors in the United States, with several U.S. brokerage websites, including Charles Schwab, Fidelity Investments, Vanguard, and Robinhood, experiencing crashes.

Affected by the global stock market, on August 5th, cross-border ETFs in the Chinese market fell collectively. Wind (Wangde) data showed that out of 128 cross-border ETFs in the entire market, 127 closed lower, and the remaining one was flat. Among them, the Nikkei 225 ETF (513880), NASDAQ Technology ETF (159509), Nikkei ETF (159866), Asia-Pacific Selected ETF (159687), and Nikkei 225 ETF Easy Fund (513000) all saw declines of over 9%.

The global market panic on August 5th did not last long. In fact, on August 6th, the Asia-Pacific market rebounded, with the Nikkei 225 index rising by 10.23%, marking the largest single-day gain since October 2008; South Korea's KOSDAQ index futures soared, triggering a halt mechanism, and the South Korean Composite Index closed up 3.3%; major European stock indexes rose collectively. The VIX index, known as the "fear gauge" for U.S. stocks, has retreated from a high of 38.57 on August 5th to around 15.3 by August 15th.

From the continuous decline at the beginning of August to the rebound after August 6th, the market trend seemed like a roller coaster. Investors are also confused about whether this storm has ended, whether the causes that triggered the storm will return, and where the global stock market will go next.

Why did the market turmoil occur?

According to the views of interviewed institutional personnel, this global market fluctuation is the result of the resonance of multiple factors: the Bank of Japan's interest rate hike leading to the closure of carry trades is the dominant logic, coupled with the high overall valuation of U.S. stocks, technology stocks' performance not meeting expectations, and weak U.S. inflation data, leading to unexpected market volatility.

Why does the yen carry trade have such a huge impact? This is because the Bank of Japan has long implemented a zero-interest-rate policy, allowing global investors to obtain funds at low cost and invest in high-interest markets. The recent narrowing of the U.S.-Japan interest rate differential has triggered a rise in the yen, with the yen appreciating 13% against the U.S. dollar from July 10th to August 5th, causing concerns about the global market's yen-financed carry trade. Stocks related to the yen carry trade, such as the decline of U.S. technology stocks, triggered stop-loss sales, leading to declines in multiple stock markets.

Looking back at the initial ripples of this turmoil, it originated in July of this year when the Nikkei 225 and the Topix indexes reached historical highs. Subsequently, on July 31st, the Bank of Japan raised the policy guidance interest rate from 0-0.1% to 0.25% and announced plans to halve its monthly purchases of Japanese government bonds during the period from January to March 2026, leading to a rapid appreciation of the yen and a reversal of global yen carry trades. On August 2nd, the U.S. released employment reports, with the number of non-farm employment additions in July significantly lower than expected and the previous value, and the unemployment rate rose to 4.3%, the highest level in nearly three years, leading to a decline in U.S. stocks and the Japanese stock market on the same day.

Liu Jingjin told Caijing that, on the surface, Japan is the center of this global stock market turmoil, and the appearance of the "Black Monday" leading decline in the Japanese stock market is due to the recent narrowing of the U.S.-Japan interest rate differential and the stop-loss sales of U.S. Treasury bonds and technology stocks in yen carry trades. However, fundamentally, the U.S. market is more critical, with the weak U.S. non-farm employment report triggering market concerns about the risk of a U.S. recession.

Goldman Sachs' U.S. economists expect that the Federal Reserve will cut interest rates three times by the end of the year starting in September, up from the previous forecast of two times; the chance of a U.S. economic recession in the next 12 months has been raised from 10% to 25%, but Goldman Sachs believes that the risk of continued recession is limited and maintains the target of 5,600 points for the S&P 500 index. Although short-term volatility may increase, from an absolute point or fair value perspective, the U.S. stock market still has about a 5% upside potential.Additionally, a research report from Goldman Sachs points out that the risk of yen carry trades has been significantly reduced. Data on net non-commercial positions of yen from the U.S. Commodity Futures Trading Commission (CFTC) showed an extreme net short position at the beginning of July, but it has since eased to a more average level. This is consistent with the feedback received by Goldman Sachs, as Liu Jingjin mentioned that the short positions in yen carry trades have decreased from about 15 billion USD at the beginning of July to over 1 billion USD currently.

Recent analysis reports from various investment banks are also corroborating this point. Morgan Stanley believes that 60% of carry trades have been closed out, while J.P. Morgan estimates that nearly 75% of the trades have been closed out, and Daiwa Securities Group believes that 95% of yen carry trades have been closed out.

Furthermore, after the sharp fluctuations in the Japanese stock market, Bank of Japan Deputy Governor Shinichi Uchida made a dovish speech, stating that the current Bank of Japan needs to firmly maintain its easy monetary policy and will not raise interest rates during market instability. Former Bank of Japan board member Seiji Sakurai even made a speech on August 12, ruling out the possibility of another interest rate hike this year.

In the United States, the initial jobless claims released on August 8 fell more than expected, which analysts say has given the market a boost, significantly easing concerns about a weak labor market. When making monetary policy decisions, the Federal Reserve will focus on two key indicators: the unemployment rate and the level of inflation. In the future, the easing of inflation and the potential rise in the unemployment rate will both strengthen expectations for interest rate cuts.

Reassessing Global Markets

As we enter August, the global market trends have been like a roller coaster. Amid the turmoil, both institutions and individuals interviewed believe that this is a good opportunity to reassess key market trends.

The Investment Director's Office of UBS Wealth Management has published a research report stating that the Japanese market, which triggered global volatility, should stabilize. In terms of the U.S. stock market, market sentiment has improved, with positive employment data from the United States, and S&P 500 earnings per share are expected to grow by 11% in 2024. At the same time, the pullback in stocks has reduced the 12-month forward price-to-earnings ratio of the U.S. technology sector to 27.4 times, down from the peak of 32 times on July 10. It is expected that the Federal Reserve may cut interest rates by 100 basis points within the year. In addition, to cope with further escalation of geopolitical situations, allocating oil and gold can add protection to the investment portfolio. It is expected that by the end of September, Brent crude oil prices will reach 91 USD per barrel, and by mid-2025, gold prices will rise to 2,700 USD per ounce.

Haitong International believes that the current high U.S. dollar interest rates provide enough ammunition to prevent a deep recession, so the probability of a U.S. recession dragging down the Japanese economy and causing another deep adjustment in the Japanese stock market is not high.Regarding the current global stock market turmoil, the Chief Economist of Morgan Stanley China, Zhiqiang Xing, stated that despite the significant fluctuations in overseas financial markets and concerns about the downturn of the US economy and the prospects of AI (Artificial Intelligence) technology, it does not negate that the world is still at the beginning of a new round of technological revolution. The global market's adjustment and reflection on the AI industry are healthy, in line with the development laws of new things, and represent an adjustment after the extreme trend trading of the capital market.

"In trading recession expectations, all equity assets will be impacted, and this round of impact may last until the Federal Reserve actually cuts interest rates or the earlier data is found to be unsustainable," said Xiaonan Zhang, a fund manager at Jing Shun Great Wall Fund. From historical experience, during the trading of recession expectations, it is actually the large companies with abundant cash flow that are less affected.

Zhang believes that during the previous style switch, technology giants have already undergone certain adjustments, and the valuation of US technology stocks is gradually regaining attractiveness. Although there is some criticism in the market about the capital expenditures of technology giants, the trend of this round of AI wave is very clear, and there is a great possibility of becoming a long-term investment theme for the next five to ten years.

What risk factors should be vigilant about now? An overseas investment experience of more than ten years of QDII fund manager analysis, the current market for the pricing of the US recession has been quite sufficient, even more aggressive, but its expectations may not be realized. If subsequent inflation data strengthens or economic growth data shows strong, the Federal Reserve may not act as aggressively as expected, and US Treasury yields may continue to fluctuate significantly. If subsequent corporate performance is not as expected, the market may be hit again, but for now, many companies' performance is still acceptable. In addition, the monetary policy of the Bank of Japan or the European Central Bank is quite different from expectations, such as the Bank of Japan's unexpected interest rate hike, or the European Central Bank's interest rate cut is less than expected, which may also impact the market.

Can A-shares be self-sufficient?

Compared with the violent turmoil in overseas markets, the trend of the A-share market is relatively independent. Liu Jingjin believes that from the perspective of overseas investors, in the context of the large fluctuations in the Asia-Pacific stock market this time, the fluctuations of A-shares and H-shares are lower than those of the Japanese, South Korean and US stock markets, and have a relatively positive risk diversification effect, becoming a more defensive market.

"The valuation of the Chinese stock market has returned to a lower level, and the price-to-earnings ratio of the MSCI China Index is about 9 times, lower than the average level. If the global market continues to fluctuate in the next period, the Chinese stock market may perform well, but in terms of absolute returns, it still depends on more policy implementation and the stabilization of the real estate market," Liu Jingjin said, "Goldman Sachs is strategically optimistic about A-shares because the pricing of corporate reform and policy easing is attractive. From an industry perspective, it maintains an overweight position on Chinese Internet."

On the other hand, what disappoints A-share investors is that during the process of overseas market repair, the Shanghai Composite Index is still hovering at a low level. As of August 15, the Shanghai Composite Index closed at 2877 points. A-share investors are also very concerned about whether the fluctuations in the overseas market will become the "seesaw" that prompts capital to flow back to A-shares?

"There are three prerequisites for capital inflow: first, the fundamentals of China's economy have significantly improved; second, the US economy weakens, and the Federal Reserve begins to cut interest rates; third, the renminbi continues to strengthen. The current market pricing of the recession trade (a series of investment strategies and asset allocation behaviors taken by investors who expect the economy to enter a recession period) may be too aggressive, and it needs further confirmation of the weakening of the US economy," the aforementioned interviewed QDII fund manager believes.

From the perspective of the flow of northbound funds, during the global market fluctuations, northbound funds show the characteristics of selling more and buying less. However, on August 15, there was a net purchase of 12.2 billion yuan.Additionally, concerns about the slowdown in US economic growth persist; will it drag down China's exports? CICC believes that, "Although we do not subscribe to the view that the US economy is facing imminent systemic recessionary pressures, the fact that growth is slowing down is undeniable. The high probability of a slowdown in growth, the front-loading of some exports in the first half of the year, and the policy uncertainty brought about by the US elections at the end of the year, may all lead to a marginal decrease in the contribution of exports, which are a major contributor to domestic growth, especially considering the continued weakness in domestic demand."

Caitong Fund Research Department stated, "The market may fluctuate upwards in the future." It believes that with the convening of the 20th Central Committee's third plenary session and the Central Political Bureau meeting on July 30, as well as signs of marginal weakening in external demand, the turning point for domestic demand policy has gradually emerged. Starting in the second half of the year, the environment of weak domestic demand is gradually turning around. The overall performance of listed companies' semi-annual reports is expected to stabilize, and the valuation of A-shares has returned to a historical low, with the volatility of funds gradually converging. In terms of the external environment, under the global economic weakness and the interest rate cutting cycle, the external liquidity environment faced by A-shares has begun to improve, further increasing the probability of market stabilization, and the configuration thinking is also expected to turn.

Compared to A-shares, Hong Kong stocks, as an offshore market, have a stronger linkage with overseas markets. Huaan Fund analyzes that as risks are cleared in stages and the US stock market stabilizes and rebounds, the scale of net outflows of foreign capital from Hong Kong stocks has narrowed, but its sustainability remains to be observed.

"The overseas market may still be quite volatile in the short term, and the weak recovery of the domestic economy continues, leading to an unclear trend in Hong Kong stocks. However, in the domestic low-interest-rate environment, Hong Kong's central enterprise dividends, with their high dividends and low valuation characteristics, are expected to attract more attention from funds. Especially after the recent slight adjustment of the high-dividend strategy, the dividend rate has further increased, making the configuration value of Hong Kong dividends more prominent," Huaan Fund believes.

Guotai Fund believes that in the short term, the environment of stable growth policy efforts and the approaching overseas interest rate cutting window is conducive to the continued rebound of core assets that have been oversold, especially in the electric new (electric power equipment and new energy), pharmaceutical, and financial sectors, while the dividend sector is relatively more affected. However, in the long term, the macro environment in the second half of the year will be more complex, and the technology and security sectors will continue to be the main themes of policy.