Investors beware of the autumn stock market continuing to decline, with a larger-scale selling wave emerging after the summer crash

Intellifinance APP noticed that large investors are preparing to deal with the continuation of the summer stock market crash into the autumn. They are concerned that after the chaos caused by the worries of a US economic recession and the surprise interest rate hike by the Bank of Japan catching currency speculators off guard, a larger wave of selling may occur.

Stock and forex trading congestion has led to price declines, volatility, and a vicious cycle of hedge fund selling. However, this sudden reversal has eased, with global stock markets rising nearly 2% so far this week.

Asset management companies managing billions of dollars in investments have stated that due to signs of weakness in the US job market and global consumption trends, the threshold for market aftershocks has been lowered. They are more likely to continue selling stocks rather than buying back.

Investors typically hedge against selling by betting on a recovery, but the mentality of buying on dips has been replaced by fear.

"This is not just a major financial market accident now, we may also describe last week's events as a major financial market accident. Its impact is even broader than this," Mahmood Pradhan, former Deputy Director of the International Monetary Fund and Global Macroeconomic Director of Amundi, Europe's largest fund management company, said.

He expects investors to remain cautious. According to data from Bank of America, investors have reduced their stock positions and are increasingly turning to cash.

Michael Kelly, Head of Multi-Asset at Matsubashi Investments, is one of those who have reduced their fund's equity market positions, managing around $170 billion in client funds.

He said, "The next two months will be very, very unstable." He added that a rate cut is expected in the US next month, but it may be too late to rescue the economy.

Investors' expectations for global growth have fallen to the lowest point in eight months.

Selling is not over yet

Weak US job reports and the Bank of Japan's unexpected rate hike have led to a global stock market sell-off, with volatility-linked and trend-tracking hedge funds exiting, and anxious investors flocking to government bond markets.

The Bank of Japan's rate hike has caused previously profitable trades worth billions of dollars to go sour. Speculators borrowed yen at low cost through these trades to purchase high-return assets such as US tech stocks.

J.P. Morgan estimates that about 70% of arbitrage trades have been closed out. However, it is difficult to measure the flow of funds linked to yen-related positions, Pradhan said, and the possibility of further liquidation is causing people to be very risk-averse.

Gerry Fowler, Head of European Equity Strategy at UBS, said that hedge fund selling may have ended, but mainstream investment managers who act more slowly typically need four to six weeks to adjust their portfolios.

Marie de Leyssac, Multi-Asset Portfolio Manager at Edmond de Rothschild Investment Partners, said these fund managers may be the next targets for selling, but she will decide whether to sell based on economic data.

While she believes that the US economy is unlikely to slow significantly, she has not bought stocks and instead leans towards buying put options, which can pay out in case of a market decline to avoid stock losses Goldman Sachs strategist Scott Rubner said in a report that pension funds will further reduce their stock exposure and shift towards fixed income. He also added that the second half of September is the worst-performing period on Wall Street since 1950.

Market Turbulence

Paul Eitelman, Chief Investment Strategist for the United States at Russell Investments, stated that if the US employment report weakens again, it could trigger new volatility.

Federal Reserve Chairman Powell's speech at next week's Jackson Hole central bank annual meeting and the earnings report of AI giant NVIDIA on August 28 are other market risk events.

Arun Sai, Senior Multi-Asset Strategist at Pictet Asset Management, said, "Even if you think fundamentally this is reasonable, the volatility makes increasing exposure difficult."

Fund managers' risk mandates often prevent them from buying stocks during significant price fluctuations.

The VIX index, which measures the expected volatility of the Wall Street S&P 500 Index and similar European indices, hit multi-year highs last week before retreating, but the related indices continue to send warning signals.

Another options market indicator, the VIX, rises when traders expect volatility to fluctuate, currently trading above the 100 level, indicating that the market frenzy is not over.

"Until you see the VIX index drop below 100, you should pay attention to it. This is the key indicator at the moment," said Stuart Kaiser, Head of Equity Trading Strategy at Citigroup