Global stock markets are collapsing, how do frontline markets view this?

The continuing spread of recession panic, coupled with sudden changes in the Middle East situation, led to a global stock market crash on Monday. The Nikkei closed down 12% with multiple circuit breakers triggered, Taiwan's stock market fell 8.4% to a historical low, South Korea's KOSPI index dropped 8.8%, marking the largest decline since 2008, Nasdaq 100 index futures fell over 5%, and European stocks fell by 3%. The Renminbi strengthened, and the Japanese Yen hit a seven-month high.

Amid global market turmoil, Wall Street analysts generally believe that the Federal Reserve will inevitably cut interest rates but the number of cuts will be limited. They also see opportunities in the bond market. Analysts caution investors to remain cautious on tech stocks and stay alert to changes in market sentiment and exchange rate fluctuations. Market volatility may intensify before the U.S. presidential election.

Daniel Tan, portfolio manager at Grasshopper Asset Management, stated:

We believe that the likelihood of the Federal Reserve cutting interest rates five times by the end of 2024 is slim. Two rate cuts are more reasonable, one in September and one in November, totaling 75 basis points by the end of the year. This indicates potential opportunities to increase bond holdings in the coming months. Overall, we believe that emerging market bonds will perform well by the end of the year in an environment of gradually declining interest rates.

Prior to the sell-off in early August, we were cautious about chasing the global stock market rally, mainly driven by the surge in global tech stocks earlier this year. Given the significant rise in tech stocks earlier this year and investors seeking to sell assets to offset losses, there may still be room for further market sell-offs in the near term.

George Bourbouras, research director at Melbourne's K2 Asset Management, commented:

The market is clearly concerned about recent weak economic data. However, inferring from last Friday's employment data seems to be an overreaction as it is just a monthly data point. A better guide would be data over three consecutive months.

It is evident that the recent momentum in the U.S. economy has slowed down. Recent improvements in U.S. core inflation data, coupled with some comments from the Federal Reserve, have led the market to expect a 25 basis point rate cut in September. The days of ultra-low cash rates in the U.S. are over.

Despite market volatility and concerns about continued weak economic data in the near term, overall returns and credit conditions remain strong. With the Federal Reserve expected to start cutting rates before the U.S. election (November 5th) implied by futures, while there are reasons for rate cuts, there may be issues on the surface. This could exacerbate market volatility ahead of the election.

Ryota Abe, economist at Sumitomo Mitsui Banking Corporation in Singapore, said:

I believe that due to the weaker-than-expected U.S. non-farm payroll report and tensions in the Middle East, the USD/JPY will fall to the 140-145 range. These two factors could put pressure on Asian markets as market participants may hesitate to take risks in this situation.

The strengthening of the Japanese Yen will also put pressure on the Nikkei index, as corporate profit margins will decrease since many companies did not anticipate such a sharp and sudden appreciation of the YenChief Currency Strategist Masafumi Yamamoto of Mizuho Securities said:

There is a further risk of the US dollar falling against the Japanese yen. The recent support level will be at 144.50, where the 90-week moving average is located. If that is the case, I believe the next target level will be 140.

However, I would like to point out that the market's expectations for a 50 basis point rate cut by the Federal Reserve at the September meeting are too high. While the US economy is showing signs of slowing down, the situation is not as bad as the market expects.

Market Strategist Charu Chanana of Singapore's Shengbao Market stated:

Last week, there was a significant shift in market sentiment from concerns about rising inflation to concerns about economic growth and the potential for an economic recession.

Currently, US economic data still dominates, and the more doubts there are about the assumption of a soft landing in the US, the more we can expect further pullbacks in stocks and arbitrage strategies, with positions in these strategies already elevated.

However, the market's expectations for a Fed rate cut seem a bit exaggerated, considering that the June dot plot only showed one rate cut and there are structural inflation factors at play. The expectation of four rate cuts this year seems somewhat far-fetched