"Black Friday"! Global stock markets collapse in succession, VIX and US Treasury bonds "turn the tables"

This week, the global capital markets experienced a "Black Friday".

After the Federal Reserve chose not to cut interest rates on Wednesday, the economic and employment data released by the United States subsequently sparked pessimism among investors: the ISM Manufacturing PMI for July, released on Thursday, contracted by the largest margin in eight months, and on Friday, weak July non-farm payroll data was announced with an increase in the unemployment rate, marking the worst non-farm payroll since the pandemic began. This has significantly heightened investors' concerns about a U.S. economic recession, leading them to believe that the Fed's rate cuts are too slow and triggering a massive flight to safety. Investors in the U.S., Europe, and Japan have been selling stocks and flocking to U.S. Treasuries, causing a sharp drop in U.S. bond yields.

U.S. Stock Market Plunge

Following the release of the disappointing non-farm payroll data on Friday, all three major U.S. indices fell together, with the S&P 500 index dropping by 1.84%, the Dow falling by 1.51%, and the Nasdaq plummeting by 2.4%, having fallen by over 10% since its peak in early July, entering a technical correction zone.

Tech stocks in the U.S. were hit hard, with Intel's stock price plunging by 26% due to poor financial performance, except for Apple which saw a slight increase, all other Mag7 stocks declined. Amazon's stock price dropped by 8.8% as its profit outlook was lower than Wall Street's expectations. Microsoft and Meta both fell by 2%.

The market capitalization of the seven tech giants has evaporated a staggering $2.3 trillion since the early July peak.

Even the previously popular small-cap stocks experienced a significant decline, with the Russell 2000 index falling by 3.52% on Friday, accumulating a 6.67% decline for the week;

Over the past month, the expectation of rate cuts has led to a large influx of funds into small-cap stocks, as in a situation where the U.S. economy is not sharply slowing down and hurting profits, small businesses often benefit more from rate cuts. However, now, the economic outlook has deteriorated.

Stuart Kaiser, head of U.S. stock trading at Citibank, pointed out that these sell-offs reflect a typical risk aversion sentiment, as disappointing economic data and corporate profit pressures prompt investors to reduce their positions for safety.

European and Japanese Stock Markets Preemptively "Plunge"

In the early Asian trading session on Friday, the Japanese stock market led the way in a sharp decline.

Due to concerns about a U.S. economic recession, as well as multiple factors such as the Bank of Japan's rate hike and the appreciation of the yen, the Nikkei 225 index closed with a nearly 6% drop, marking the largest single-day decline since 2016. Shares of Japanese tech companies such as Tokyo Electron, SoftBank, Lasertec, and Advantest plummeted significantly Analysts pointed out that due to highly leveraged Japanese retail investors eager to sell the popular Nomura NF Nikkei 225 ETF, the ETF fell by 11.46% at the close on Friday, which was another important reason for the accelerated decline in Japanese stocks.

The Bank of Japan decided to raise interest rates and reduce the scale of government bond purchases at its monetary policy meeting on Wednesday. After the "double-barreled" move of raising interest rates and shrinking the balance sheet, Bank of Japan Governor Haruhiko Kuroda also stated at a press conference on the same day that given the upward risks to inflation, the possibility of another rate hike this year cannot be ruled out.

As a result, the yen strengthened, and the expectation of increased profits for export companies due to the appreciation of the yen quickly cooled, causing concern for Japanese exporters.

Bruce Kirk, head of Japanese stock strategy at Goldman Sachs, said, "We believe that the story of the Japanese stock market has not been shattered, but the rules of the game have certainly changed."

In the European trading session, European stocks also plummeted, with the Euro Stoxx 600 index falling by 2.7% on Friday.

Priya Misra, portfolio manager at J.P. Morgan Asset Management, believes that investors are taking measures to address the risk of the Federal Reserve cutting interest rates too slowly, and all asset classes should reflect this. After all, the market is forward-looking, and some are beginning to realize the danger of the U.S. economy possibly entering a recession.

Market Risk Aversion Surges

Amidst the turmoil in the U.S., European, and Japanese stock markets, the VIX panic index rose by 26.04% on Friday, closing at 23.43. During the night trading session, it approached the 30 mark, reaching the highest level since the banking crisis in March last year.

Under strong risk aversion sentiment, investors flocked to U.S. Treasuries, with ETFs tracking U.S. Treasuries surging by 6% this week. Investors are betting that the Federal Reserve will be forced to cut interest rates significantly to address economic weakness in the future, which has also led to a sharp drop in U.S. bond yields. The yield on the 2-year U.S. Treasury, sensitive to interest rates, fell by 30 basis points, while the yield on the 10-year U.S. Treasury also dropped by 18 basis points, both falling to their lowest levels since December last year.

Steven Blitz, Chief Economist at TS Lombard, stated that the Federal Reserve was wrong not to cut interest rates on Wednesday.

Investors currently expect the Federal Reserve to cut interest rates by 100 basis points by the end of this year, meaning that the Federal Reserve is expected to cut rates by at least 50 basis points in one of the remaining three meetings this year.

Rick Rieder, Chief Investment Officer for Global Fixed Income at BlackRock, said, "It is expected that the Federal Reserve may need to cut rates by 50 basis points in September, as interest rate-sensitive sectors of the economy are suffering losses, such as small businesses and low-income consumers."