Reason to Panic? Key Insights and What You Can Do
On August 5, global stock markets experienced a severe downturn, igniting what has been termed "Black Monday." Japan's $Nikkei 225 (.N225.JP)$ plummeted by 12.4%, marking its second-deepest decline on record. This substantial drop has exacerbated fears of a potential recession in the United States, following last week's global market declines.
In Australia, the $S&P/ASX 200 (.XJO.AU)$ closed 3.7% lower, reaching its lowest level in two months. The sell-off was precipitated by a concerning report on the US labor market for July, which revealed an increase in unemployment to 4.3%, the highest level since October 2021. This report had already led to a sharp decline on Wall Street on Friday.
Further compounding market anxieties are escalating tensions in the Middle East, which are placing additional pressure on investor sentiment. The Nikkei's performance was notably influenced by growing pessimism surrounding the US economy and the strengthening of the yen, following the Bank of Japan's latest rate hike.
US Recession Fears
On Friday, the Bureau of Labor Statistics reported disappointing jobs data, revealing a rise in the U.S. unemployment rate to 4.3% and the addition of only 114,000 jobs. This has sparked fears that the Federal Reserve's failure to cut interest rates sooner could push the economy into a recession. The central bank has kept rates at pre-Great Recession levels to control inflation, but some economic and financial indicators suggest the U.S. economy is weakening rapidly as a result.
Markets panicked after the release of the report that triggered the Sahm Rule, which indicates that a recession is likely when the three-month average unemployment rate rises by half a percentage point from its previous year's low. This rule, named after former Fed economist Claudia Sahm, is based on the idea that rising unemployment can become self-sustaining as job losses lead to reduced spending and further job cuts. However, Sahm herself doubts a recession is imminent. The recent rise in unemployment is attributed to more people entering the job market rather than companies cutting jobs.
![Source: US Department of Labor](https://sgsnsimg.moomoo.com/sns_client_feed/151000101/20240806/84deafe998f34ddbb5885e438b009c0e.png?area=102&is_public=true/bigmoo)
Jay Bryson, chief economist at Wells Fargo, acknowledges the increased recession risk but believes the economy will ultimately avoid it, noting the absence of major economic shocks like a spike in oil prices or a housing bust. Additionally, other traditional recession indicators, such as the "inverted yield curve" and two consecutive quarters of shrinking economic output, have proven unreliable in the post-pandemic era.
The Yen Carry Unwind
A rapid unwinding of "carry trades," where investors borrow in low-interest currencies and reinvest in higher-yielding assets, extended on Monday amid a global sell-off in risk assets. This led to a surge in traditional safe-haven currencies like the yen and Swiss franc.
![Source: moomoo](https://sgsnsimg.moomoo.com/sns_client_feed/151000101/20240806/a65d2552710a40be96dce4a1f81ce58c.png?area=102&is_public=true/bigmoo)
You can't unwind the biggest carry trade the world has ever seen without breaking a few heads. That is the impression markets give us this morning," Kit Juckes, chief foreign exchange strategist at Societe Generale, said in a research note published Monday.
The liquidation of carry trades is accelerating amid concerns over a US recession and thin summer markets. This deleveraging is causing significant market volatility. The Bank of Japan's recent rate hikes are ending the era of cheap borrowing, prompting traders to unwind yen-funded positions. The Chinese yuan is also being eyed as a potential funding currency amid economic concerns. The scale of these carry trades is creating structural problems in the market.
The rise of Japan interest rates is changing the game rules," said Pierre-Yves Gauthier, head of research at Paris-based brokerage AlphaValue. "In essence it's the end of a free resource."
![Source: Bloomberg](https://sgsnsimg.moomoo.com/sns_client_feed/151000101/20240806/00473ffea0b441a4b0a4706c70a9a49d.png?area=102&is_public=true/bigmoo)
Disappointing Major Tech Earnings
The global financial markets recently experienced significant turmoil, partly due to disappointing earnings reports from major tech companies. Concerns over economic stability have rippled through the stock market. Since July, tech giants have seen substantial drops in market capitalization as their quarterly results fell short of expectations, prompting investors to move away from the AI sector.
In the first half of 2024, investor optimism about AI advancements drove tech stocks higher. However, second-quarter earnings reports revealed that investment in AI infrastructure led to increased costs with only modest gains. Microsoft reported revenue below analysts' expectations, while Tesla posted its lowest profit margin in over five years. Alphabet, Google's parent company, saw a slowdown in YouTube advertising sales, raising concerns about its margin expansion.
Downside Protection Trading
Inverse ETFs are exchange-traded funds designed to profit from market declines, but they are complex and risky investments. These "short" or "bear" ETFs bet against the daily performance of an asset or market index and are often used by day traders during volatile periods to mitigate exposure or profit from downward market movements. The U.S. Securities and Exchange Commission describes them as "specialized products with extra risks for buy-and-hold investors."
The Nasdaq Composite Index entered correction territory, falling over 10% from its early July high, after disappointing jobs data and earnings reports from Amazon and Intel spooked investors. Intel's stock plunged 26% last Friday, its worst day since 2000, and Amazon fell nearly 9%, its worst day since 2022. This led to a surge in inverse or inverse leveraged ETFs, which offer outsized returns on quick market downturns. Notable ETFs that spiked include $Direxion Daily Semiconductor Bear 3x Shares ETF (SOXS.US)$ and $MICROSECTORS FANG & INNOVATION -3X INVERSE LEVERAGED ETN (BERZ.US)$. If the sell-off in tech stocks continues, investors can look into these types of inverse ETFs to hedge their long positions. However, in a rebounding market, these ETFs could result in significant losses.
Source: CNBC, Bloomberg, REUTERS, APNEWS, Yahoo Finance
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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