The two main "culprits" of the market's violent fluctuations? The Federal Reserve and the Bank of Japan have been heavily criticized!
The sharp market volatility has raised doubts about the interest rate decisions of the Federal Reserve and the Bank of Japan. The market plummeted as a result of the Bank of Japan's rate hike, which was blamed for triggering risk-averse trading. The market sell-off has also made it difficult for the Federal Reserve to make a decision on interest rate cuts, with concerns that it may make a policy mistake by keeping rates too high. The Bank of Japan and the Federal Reserve will face greater challenges, with investors expressing concerns about their ability to handle a market crash. The market has already begun pricing in emergency rate cuts, but the Federal Reserve needs to weigh the trade-offs between timely rate cuts and panic-driven rate cuts
After the market crash on Monday, the market is rebounding, posing challenges to the interest rate decisions of the two major central banks.
In Japan, the benchmark Nikkei 225 index saw a sharp rebound on Tuesday, rising by 10.2% and recovering most of the losses from Monday. Meanwhile, South Korea's KOSPI index rose by 5.6%, and US stock index futures also edged higher on Tuesday after a sharp drop on Monday.
Kyle Rodda, senior market analyst at trading platform Capital.com, said, "The market is currently very crazy."
Market volatility is caused by various factors, including poor earnings performance of several tech giants and the soft July non-farm payroll report. This is also partly due to the Bank of Japan raising interest rates to the highest level in 15 years, causing the yen to rise and unraveling a series of global interest rate differential trades.
The market turbulence has put the Bank of Japan and the Federal Reserve in a dilemma, with analysts and investors questioning the timing of interest rate decisions by these two central banks.
In fact, the Bank of Japan's rate hike triggered a market crash, leading to strict scrutiny and criticism of its measures.
Foreign media reported on Monday that some analysts speculated that the Bank of Japan's rate cut was due to political pressure to support the struggling yen. Vishnu Varathan, Chief Economist for Asia (excluding Japan) at Mizuho Bank, wrote in a report on Monday that the Bank of Japan was a "conspirator" in triggering risk aversion trades.
Looking ahead, the Bank of Japan may face a more difficult test in deciding the timing of rate hikes. Varathan wrote that it may also struggle to "convincingly reverse the already runaway hawkish guidance."
Furthermore, market sell-offs have made the Federal Reserve's decision on the timing and extent of rate cuts more challenging.
After the Federal Reserve decided to keep interest rates unchanged for the eighth consecutive time last week, coupled with the soft US July non-farm payroll report, investors have become uneasy. Now, the market crash is posing a challenge to the Federal Reserve's ability to achieve a soft landing for the US economy.
Varathan wrote, "The market is now worried that the Federal Reserve has inadvertently made a policy mistake of 'persistently high rates'."
Currently, there are even discussions about an emergency rate cut by the Federal Reserve, which is now starting to be priced in by the market.
However, Varathan wrote, "The Federal Reserve must strike a delicate balance between 'timely rate cuts and panic rate cuts'." Rodda of Capital.com said that discussions about rate cuts seem premature, as they appear to be driven by pressures and volatility in the stock and forex markets. He said:
"I think the only reason to convene an emergency meeting would be if we saw significant market dysfunction in funding or government bond markets, which we simply haven't seen, or a complete breakdown in the labor market, which would likely be due to a significant external shock. Neither of these things have happened, at least not yet."