Global stock markets have evaporated $6.4 trillion, traders are worried that the "big crash" has just begun

Zhitong Finance APP noticed that the market's decline on Monday even shocked seasoned market participants. In Tokyo, the Nikkei index fell by 12%. In Seoul, the South Korean composite index dropped by 9%. As the opening bell rang in New York, the Nasdaq index plummeted by 6% within seconds.

At the same time, cryptocurrencies fell; the VIX index, which measures stock market volatility, soared; investors rushed to buy the safest assets - U.S. Treasury bonds.

It is currently unclear whether Monday's drastic fluctuations signal the final outbreak of global selling that began last week or herald the start of a long-term downturn. But one thing is clear: the pillars that have supported the rise of financial markets for years, a series of key assumptions that global investors have relied on, have been shaken. In hindsight, some of these pillars seem naive: the unstoppable momentum of the U.S. economy; artificial intelligence rapidly changing businesses worldwide; Japan never raising interest rates - or not raising them significantly enough to matter.

Over the past few weeks, a wealth of evidence has emerged that undermines the above two reports. The U.S. July employment report showed weakness. Large tech companies' quarterly earnings driven by artificial intelligence were also weak. The Bank of Japan raised interest rates for the second time this year.

The triple blow has suddenly made investors realize the enormous risks involved in pushing up Nvidia's stock price by 1,100% in less than two years, or buying a large amount of junk-grade loans packaged into bonds, or borrowing money from Japan and then investing it in Mexican assets with an 11% yield. In three weeks, global stock markets have evaporated about $6.4 trillion.

Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank in Singapore, said, "This is a big reversal." In the words of traders, trying to pick the right time to buy falling assets is like trying to catch a falling knife. Now, Varathan says, "Falling knives are everywhere."

Global market panic led to a sharp drop in the Japanese stock market

Market panics like this can bring risks of all sizes. The most prominent among them is: if not controlled, selling may disrupt the functioning of the financial system, slow down lending, and become the final straw that pushes the global economy into the recession many are now worried about.

This has prompted calls for the Federal Reserve to start cutting interest rates - some believe even before the next scheduled policy meeting in September. In the bond market, the rush for short-term government bonds briefly pushed the yield on two-year U.S. Treasuries below that of 10-year Treasuries, for the first time in over two years. This is known as an inverted yield curve, and the yield curve has once again returned to its usual shape, a change often seen as a sign that an economic recession is imminent x-oss-process=image/format,jpg/quality,Q_90)

The inversion of the US yield curve reflects traders' concerns about an economic recession.

For economist Ed Yardeni, who has closely followed the market for half a century, the sudden market crash is reminiscent of Black Monday in 1987, when a one-day plunge caused the Dow Jones Industrial Average to drop by 23%. Yardeni pointed out that while it was terrifying, it was not ultimately a harbinger of an economic disaster.

Yardeni stated, "People thought we were in or about to enter a recession, but that wasn't the case," "It was actually related to internal market factors. I think the same thing is happening here."

In the current bull market, the market has also been impacted by premature recession concerns. Last year, early in the year, these concerns erupted briefly in a bank panic, but as the US economy continued to grow strongly, these concerns almost as quickly dissipated. The stock market also rebounded strongly from the 2022 slump and has been hovering at historic highs this year.

However, in recent days, there has been a significant shift in sentiment globally, breaking the usual end-of-summer lull.

As losses continue to mount in major markets, Matt Maley, Chief Market Strategist at Miller Tabak, said, "I remember the situation in 1987."

The factors that triggered Monday's turmoil had been gradually building up over the past few weeks.

In early July, as tech stocks peaked, the yen began to appreciate significantly as investors anticipated the Bank of Japan to withdraw a large amount of monetary stimulus along with other central banks. This prompted traders to unwind so-called carry trades, borrowing cheaply in Japan and then investing elsewhere to preserve their profits. This in turn brought selling pressure to global markets as borrowed funds were repaid.

Subsequently, as earnings reports continued to be released, concerns grew about the excessive gains of large tech stocks (the main drivers of the recent stock market rally) that have yet to see any profits from their massive investments in artificial intelligence. Both Amazon and Intel saw significant declines after disappointing performances.

At the same time, worries in the bond market intensified as data showed some sectors of the economy cooling down. By last Wednesday, the Fed kept rates steady at their highest level in over 20 years, the Bank of Japan tightened its policy, and bond prices rose. Last Friday, following an increase in the unemployment rate and job growth far below expectations, the stock market rose further.

Wall Street economists began predicting that the Fed would need to cut rates by half a percentage point or take action between meetings - a move usually reserved for times of crisis.

Shoki Omori, a strategist at Mizuho Securities, was prepared for significant market volatility, but even he was surprised by the scale of the sell-off.

Due to the Bank of Japan's rate hike, the yen surged by 3%, the Nikkei index fell all day, and the closing decline was the largest since 1987.

"This exceeded my expectations," Omori said. "We are entering some unimaginable trading territory. Be prepared for more." Losses then spread to other Asian markets and Europe, with major European stock indices plummeting before spreading to the Americas. The losses also extended to the credit markets, with at least two companies - wireless infrastructure provider SBA Communications and theme park operator SeaWorld Parks & Entertainment - postponing loan transactions totaling $3.8 billion.

By the afternoon in the United States, the stock market rebounded from its lows, with the Nasdaq Composite Index falling by 3.4% and the bond market stabilizing. However, this did not calm panicked traders, who were unwilling to dismiss this as another false alarm.

"I'm still very worried," said Maley, a strategist at Miller Tabak. "We are still concerned about earnings and the economy."