On August 5th, a global panic struck suddenly, upending the world's financial markets and triggering a panic selling of stocks, currencies, and even Bitcoin, causing a plummet in value across the board. This has drawn comparisons to 1987, when the U.S. stock market experienced its largest single-day drop in history, with the S&P 500 index falling by over 20% on the "Black Monday" in October of that year. Prior to this, after an astonishing surge in August, investors had accumulated excessive leverage, and the stock crash led to a massive wave of margin calls, while poorly designed algorithmic trading exacerbated the selling. Technically speaking, this global financial market upheaval is similar to the panic selling of 1987, and this downturn appears to be primarily driven by the rapid and chaotic liquidation of speculative currency bets, rather than any actions by individual Japanese companies.

While people were still debating whether the 1987 stock market crash was being replayed, on August 6th, the Japanese and Korean markets saw a significant rebound. In the early morning of August 6th Beijing time, the Nikkei 225 futures surged by 8%, touching the circuit breaker. The South Korean KOSDAQ futures skyrocketed, triggering the "SIDECAR" trading halt mechanism. The Japanese and Korean stock markets opened sharply higher, with the Nikkei 225 index quickly rising by more than 3,200 points after the open, a gain of over 10%, recouping most of the 12.4% loss from the previous trading day; battered tech stocks were on the rebound, with semiconductor manufacturing equipment maker Tokyo Electron's stock price rising by 17%. The South Korean Composite Index opened up by more than 4%. The Nasdaq 100 Index futures and the S&P 500 Index futures main contracts rose by 1.40% and 0.98%, respectively.

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Other significant market trends were also reversing: the yen's exchange rate against the U.S. dollar had fallen from a peak of around 142 yen per U.S. dollar to 146.053 yen per U.S. dollar, a daily increase of 1.30%. The yen had previously strengthened significantly due to the closure of carry trades.

An unnamed economist from JPMorgan told Caijing that it was clear the market was oversold, with an atmosphere of forced exits, and now the market was catching its breath.

From a more macro perspective, several market analysts on Wall Street told Caijing that there were many factors that triggered the sudden market panic, and no single reason could fully explain the scale of the market sell-off. Behind the global market's upheaval was a considerable period during which investors had been fully invested, reaching a critical point where they could not withstand the slightest disturbance, let alone the concentration of unfavorable factors this time.

On the 5th, the Japanese and Korean stock markets faced a fierce sell-off as soon as they opened, and then the panic spread globally. By the close of the day, the Nikkei 225 index had accumulated a 12.4% drop, erasing the gains since the beginning of 2024, also setting a record for the largest single-day point drop, surpassing the record of "Black Monday" in October 1987; the South Korean Composite Index saw its largest drop since 2008, with major indices in the stock markets of Japan, South Korea, and Turkey triggering circuit breakers. The Asia-Pacific markets in Australia and India also saw significant sell-offs.

European stocks also suffered a heavy blow after the opening. The three major European stock indices fell across the board that day. The FTSE 100 index in the UK's London stock market closed at 8008.23 points on the 5th, down 166.48 points from the previous trading day, a drop of 2.04%. The CAC 40 index in the Paris stock market closed at 7148.99 points, down 102.81 points from the previous trading day, a drop of 1.42%; the DAX index in the Frankfurt stock market closed at 17339.00 points, down 322.22 points from the previous trading day, a drop of 1.82%.

The three major U.S. stock indices closed sharply lower, with the Dow Jones falling by more than a thousand points and the Nasdaq plummeting by over 3%. By the close, the Dow Jones Industrial Average had fallen by 1033.99 points from the previous trading day, closing at 38703.27 points, a drop of 2.60%; the S&P 500 index fell by 160.23 points, closing at 5186.33 points, a drop of 3.00%; the Nasdaq Composite Index fell by 576.08 points, closing at 16200.08 points, a drop of 3.43%. Among them, the "Magnificent Seven" once saw a single-day market value drop of nearly $1.3 trillion, and by the close, nearly $800 billion (approximately 5.7 trillion yuan) had evaporated, the largest single-day market value evaporation for tech giants since the 2012 listing of Meta Platforms (then Facebook). The Bloomberg Magnificent 7 Price Return Index closed down by 4.30%.

The collapse first traces back to the yen carry trade after the pandemic. It allowed investors to invest in large trading houses with stability and high cash return capabilities in yen assets, and also to invest in Japanese tech stocks that benefited from the global industrial chain division. Therefore, when the AI boom occurred in 2023, Japanese stocks and Japanese tech companies also benefited. However, since mid-April of this year, the trends of Tokyo Electron and NVIDIA have clearly diverged, with the gains of leading companies partially decoupling from fundamentals, and capital factors gradually taking a dominant position. Non-leading companies could no longer keep up with NVIDIA's pace, and the phenomenon of leading companies like NVIDIA siphoning off funds became increasingly apparent. The Japanese market structure is relatively singular, mainly concentrated in Japanese trading houses and the electronics industry. The fluctuations in the U.S. stock market have a significant impact on Japanese stocks, especially in the semiconductor and artificial intelligence-related industrial chains. Traders hedge the risk of the decline in yen domestic assets by selling yen, and maintain the stability of yen asset value through currency hedging operations. With the release of yen funds, U.S. tech leaders have indirectly added leverage with funds. Since this stage, the exchange rate and the traditional liability logic of interest rate differentials have decoupled, that is, the U.S.-Japan interest rate differential and the yen exchange rate have decoupled. The yen carry trade has recently triggered a significant appreciation of the yen and adjustments in Japanese stocks. Market volatility is mainly caused by excessive leverage on the asset side, rather than the chaos on the liability side. The appreciation of the yen is essentially a correction of the previous over-depreciation.

The divergence of monetary policies between the Federal Reserve and the Bank of Japan has caused shocks in the global financial markets.The economies of the United States and Japan have not plunged into dire straits. Federal Reserve Chairman Powell stated at the end of July that he needed more data to justify the rationale for a rate cut. The employment report revealed several areas of weakness: 114,000 new jobs were added in July, significantly below the June level and also below expectations; the number of new jobs added in the previous few months was revised downward; at the same time, the unemployment rate rose to its highest level since October 2021; the year-on-year wage increase in July was 3.6%, lower than the 3.8% in June. The overall pace of the U.S. economy has recently accelerated its cooling trend; the manufacturing data also performed flatly, triggering concerns that Federal Reserve officials may keep borrowing costs at a high level not seen in over 20 years for an extended period. Under the influence of high interest rates, a slowdown in the U.S. economy is a general trend. Historically, the Federal Reserve maintaining high interest rates for too long often leads to economic recession or systemic financial risks. Therefore, the recent slowdown in the U.S. economy has led the market to associate with the decline in risk assets and the Federal Reserve's easing during past U.S. economic cycles. The greatest concern is a hard economic landing and a fall into recession.

The market has shifted from its previous optimistic expectations of an imminent rate cut by the Federal Reserve to worrying that the Fed's actions may already be lagging, perhaps they should have already started cutting rates. This concern is exacerbated by the fact that, as planned, the Federal Reserve will not hold a rate-setting meeting in August or October, so the path to a rate cut is not broad. The fear is that the Federal Reserve's late rate cut will lead to a weak U.S. economy, affecting the spillover to the global economy. However, it is premature to judge from the data of just one month in July that the U.S. economy has begun to accelerate its downward trend and is heading towards a recession.

The situation in the Japanese economy is relatively mild, with neither much evidence that companies are in trouble nor many people worrying about the Japanese financial system. The Bank of Japan decided at the end of its monetary policy meeting on July 31 to raise interest rates and reduce the scale of government bond purchases, raising the policy interest rate from 0% to 0.1% to around 0.25%. As a result, the yen appreciated sharply against the U.S. dollar, rising more than 4 yen in one day, reaching a high point in more than four months. The Bank of Japan raised interest rates and announced a quantitative tightening roadmap. The Bank of Japan is looking for evidence that wage increases will stimulate spending, stimulate demand-led price increases, and form a virtuous cycle. The South Korean government also stated on the morning of the 6th that it will take measures when market fluctuations are too large, with sufficient policy capabilities, and the foreign exchange and currency markets show a stable trend.

Jeffrey Young, former Global Head of Foreign Exchange at Citigroup and co-founder and CEO of DeepMacro, told Caijing that most foreign exchange strategies are based on interest rate differentials and momentum. However, when market conditions are unfavorable, these strategies will suffer significant drawdowns. So far this year, interest rate differentials have performed well, and the biggest winners in the interest rate differential portfolio have been the Swiss franc and the yen. These currencies have always been short in interest rate differentials, while short positions are scattered in various other currencies. In the market, common interest rate differential strategies have also performed well. In many weeks in the past, compared with many other countries in the G10, Japan has scored positively in terms of economic growth, earning a long position for the yen in the economic growth pillar. These long positions have also coincided with the yen's cyclical appreciation several times. However, if you directly short the yen interest rate differential during these periods, the performance may not be so good, especially compared with common interest rate differential strategies.

As the trend of yen appreciation in the foreign exchange market has slowed down, investors have begun to seek short-term rebound opportunities, driving stock market buying. Analysts say that the economic data from Japan and the stance of the South Korean government on the morning of the 6th have had a positive impact on market sentiment. Data released by Japan's Ministry of Health, Labor and Welfare before the market on that day showed that Japan's labor cash income in June increased by 4.5% year-on-year, expected to increase by 2.4%, and the previous value was revised from an increase of 1.9% to an increase of 2%; overtime pay increased by 1.3% year-on-year, the previous value increased by 2.3%. Japan's total household spending in June decreased by 1.4% year-on-year, expected to decrease by 0.9%, and the previous value decreased by 1.8%; it increased by 0.1% month-on-month, expected to increase by 0.2%, and the previous value decreased by 0.3%. Japan's real wages adjusted for inflation in June increased by 1.1% year-on-year, rising for the first time in 27 months. These economic data add a bright spot to the prospects of a consumption recovery and the emergence of a positive growth cycle in Japan.

It cannot be ignored that some structural issues are also being exposed. In the U.S. stock market over the past year, investors have been overly concentrated in leading companies, especially technology giants like Nvidia, leading to low market volatility but high leverage. In addition, the market valuation is too high and the concentration is too high, making any performance below expectations trigger violent market fluctuations. Buffett's reduction in holdings also reflects concerns about overvaluation in the market.