Global stock markets, why did they crash?

Panic Strikes Again!

As concerns about a US recession escalate, coupled with the surge of the Japanese yen and geopolitical tensions in the Middle East, global stock markets collapsed across the board on Monday.

The MSCI Emerging Markets fell by over 3%, marking the largest single-day drop since June 2022; Japanese stocks entered bear market territory, with both major indices triggering circuit breakers multiple times; South Korean stocks saw their biggest drop since 2008, with Samsung falling by over 10%; Taiwan stocks set a new record for single-day decline, with TSMC dropping nearly 10%; US stock futures collectively declined, with Nasdaq 100 index futures falling by over 5%...

As global markets experience a major crash, who is the culprit behind the scenes?

Arbitrage Trades Liquidated, "Group Holding" Stocks Collapse

Looking back at the "turning point" of global assets, the sharp rise of the Japanese yen may be the biggest signal, supported by two main logics.

Firstly, the narrowing of the US-Japan interest rate differential has reversed the "arbitrage trades":

For the most popular arbitrage trade in the foreign exchange market of "selling yen, buying dollars," the larger the US-Japan interest rate differential, the greater the profit potential for investors.

With the unexpected rate hike by the Bank of Japan last week and the near-complete pricing in of a rate cut by the Federal Reserve in September, the allure of arbitrage trades has diminished. Investors have started to exchange their US dollar assets back to yen, leading to a surge in demand that strengthens the Japanese yen.

Secondly, under the "recession trade," funds heavily withdrawn from tech stocks:

Driven by various uncertainties in the global market and the AI frenzy, global investors had previously poured into US tech stocks.

However, as weakening US economic data sparked recession concerns, US stocks entered a risk-off mode. Funds that were previously "holding" tech giants began to withdraw, triggering a rotation between tech stocks and small-cap stocks. The flow of funds back to Japan injected a dose of confidence into the Japanese yen.

Growing Concerns, Dark Clouds of US Economic Recession Looming

Continued weak economic and employment data, collective disappointments in performance by consumer giants, exacerbating the risk of a "hard landing" for the US economy, have severely shaken global investor confidence.

In the week ending July 27, the number of initial jobless claims in the US exceeded expectations, and non-farm payrolls for July saw a significant decline, pushing the unemployment rate to its highest level in three years, triggering the highly accurate recession indicator - the "Sam Rule."

Furthermore, the US ISM Manufacturing PMI for July was 46.8, marking the largest contraction in eight months, intensifying recession concerns.

In terms of second-quarter performance, US consumer giants generally fell short of expectations Including consumer giants such as Starbucks, Nestle, Procter & Gamble, and L'Oreal, their revenue growth in the second quarter has all declined and generally fell short of expectations. Starbucks' same-store sales dropped by 3%, L'Oreal's same-store sales growth slowed to 5.3%, and Nestle and Procter & Gamble's revenue growth were both below expectations.

This indicates that the biggest pillar supporting the U.S. economy - the consumer sector - is overall weak, with subdued consumer discretionary spending.

"Stock God" Slashes Heavyweight Stocks, Sending a Bearish Signal

Amid a significant pullback in the U.S. stock market, "Stock God" Warren Buffett "slashes" his top holding Apple, shaking the global markets.

The latest quarterly report released by Berkshire Hathaway shows that by the end of the second quarter, the company's Apple holdings decreased from 789 million shares in the first quarter to about 400 million shares, a reduction of nearly 50%; since July, Berkshire Hathaway has also cumulatively reduced its holdings of about 90 million shares of Bank of America, cashing out about $3.8 billion.

CFRA Research analyst Cathy Seifert commented that Buffett's massive sell-off may be due to recession concerns, stating that Berkshire is "preparing for a soft economic environment."

After the massive sell-off, Berkshire Hathaway's cash reserves may have reached a historical high of nearly $200 billion, sending another signal to the already jittery market: there will be cheaper entry opportunities in the future, rather than now.

Edward Jones analyst Jim Shanahan bluntly pointed out that Buffett's move is "a sell signal":

"The level of selling activity is much higher than we expected."

According to media reports, senior analyst Jesper Koll commented that Buffett's actions seem to imply: In the global financial markets, everything starts from the U.S. and ends in the U.S. With the sudden increase in recession risks in the U.S. economy, the cycle of the U.S. dollar appreciation is coming to an end.