Multiple factors resonate, affecting global asset performance

      Q.1: Since July, global markets led by Japan have seen a rapid decline, and last week the global capital markets even experienced a "Black Monday". How to view the sharp volatility in this round of global capital markets? What are the reasons behind the severe turbulence in overseas stock markets?

      A: Recently, the prices of major assets in global markets have fluctuated significantly, which is influenced by multiple factors.

      Before the global market crash last Monday, there were already signs indicating a weakening of risk appetite. For example, U.S. economic data in July generally pointed to a slowdown. Since inflation in the U.S. unexpectedly cooled in mid-July, market expectations for Federal Reserve rate cuts had already emerged. The extremely hot Japanese yen carry trade also began to loosen, with the yen starting to appreciate significantly at that time, while the Japanese stock market showed increased volatility and a downward trend.

       The Bank of Japan (BOJ) raised interest rates with an unexpectedly hawkish stance, intensifying the unwinding of carry trades. Additionally, recent earnings disclosures, including those of U.S. stocks, have been extremely dense, and tech giants represented by the "Seven Sisters"* (Microsoft, Apple, Google, NVIDIA, Amazon, Meta, Tesla) failed to bring new positive surprises to the market. On the evening of August 2, the U.S. non-farm payroll data unexpectedly disappointed, triggering recession concerns. Coupled with the sharp decline of some tech giants due to earnings missing expectations and fluctuations in the Middle East situation, these densely emerging negative factors suddenly fueled market risk aversion, rapidly evolving into recession trading. These factors reached a climax at the opening of Asian markets last Monday. The 剧烈 (sharp) market correction may have also triggered technical operations such as leveraged position liquidation, CTA (Commodity Trading Advisor) position unwinding, and risk parity portfolio rebalancing, which further pushed or exacerbated market volatility.

       To explore the root causes of the current market volatility, it essentially stems from market concerns about a U.S. recession. Coupled with the fact that leading companies had significant prior gains, leading to elevated valuations, and their Q2 earnings failed to continuously deliver substantial positive surprises, the decline under recession worries has been rather rapid.

       *The above companies are for illustrative purposes only and do not constitute investment advice. The market is risky, and investment requires caution.

　　The U.S. economy may still achieve a "soft landing"

      Q.2: Considering factors such as the global macro - environment and monetary policies, how might the volatility in the global market evolve? What are your views on the future direction of overseas markets?

      A: Last week, market news was relatively uneventful. Currently, the first thing to observe is whether the market can gradually stabilize amid volatility.

      From a global macro perspective, there is currently no definitive data indicating that the U.S. economy will experience a "hard landing". The unexpectedly weak July employment data also requires follow-up data to confirm whether a trend has formed. In terms of monetary policy, a rate cut by the Federal Reserve in September has basically become a foregone conclusion. Whether it will be a 25-basis-point cut or a 50-basis-point cut as currently priced by the market still depends on whether there are clear signs of a weakening U.S. economy in subsequent data. As there is still a period of time until the September meeting, close tracking is needed. After the September rate cut, it will depend on the reaction of market participants.

      Although this round of adjustment appears relatively drastic in form, from the perspective of fundamental trends, this direction is not unexpected. As mentioned above, the factors currently worrying the market need to be verified by data, and the effect also needs to be observed after monetary policy adjustments. Before clear information is seen, the market may maintain volatility. In the follow-up, if it is believed that the economy is still moving towards a soft landing, risky assets are expected to perform under the boost of interest rate cuts. However, if more signs indicate the risk of a hard landing, risks should still be noted.

　　The seesaw effect between overseas stock and bond assets is obvious

      Q.3: In the midst of huge shocks in the global economy and financial markets, the allocation strategy of major asset classes has become particularly important. In the face of an uncertain market environment, what are the advantages of diversified asset allocation?

      A: The current market volatility is mainly caused by recession expectations, so the seesaw effect between stocks and bonds is very obvious, which also intuitively reflects the advantages brought by diversified asset allocation. In addition, we have also observed that even for market fluctuations triggered by the same factor, markets in different regions show different performances due to their own characteristics. The investment portfolio of funds can carry out extensive asset allocation, make full use of market tools, utilize the different characteristics of assets, and enrich the categories of portfolio asset allocation, so as to improve the risk - return ratio in such a market.