Financial markets have witnessed a dramatic change with significant volatility in recent days. While markets were witnessing a sustained recovery, recent events have led to sharp volatility that has alarmed investors and significantly affected market sentiment.
In this context, financial expert John Stepek provides Bloomberg with a comprehensive analysis of the events that occurred and what these fluctuations mean for investors.
Stepik reviews the influencing factors that led to these dramatic changes, and highlights the potential implications of these developments for future investment strategies.
Market bounce
Stepek points out that after a day of sharp declines in the market there was a noticeable rebound, with Japan’s Nikkei and Topix rising 10.2% and 9.3% respectively, representing a remarkable one-day gain.
However, the main question remains: what happens next?
Forced Selling and Market Flows
Stepek stresses the importance of distinguishing between fundamentals and market flows. While fundamentals involve analyzing investments based on their prospects, flows take into account where money actually goes in the markets.
Recent market turmoil has been driven largely by forced selling rather than changes in investment fundamentals, for example when leveraging investments small market movements can have large financial impacts.
If an investor uses leverage to increase his exposure to a stock and the stock price declines, losses may multiply, leading to margin calls and forced sales of other assets to cover the losses.
Causes of disorder:
According to Stepek, the recent market turmoil is attributed to several factors:
- Recession fears: As fears of a possible recession in the United States increased, affecting market sentiment, the chances of a faster rate cut in the United States rose, while the Bank of Japan took a more hawkish stance than expected.
- yen strengthMany investors were betting on a weaker Japanese yen, but the unexpected rise in the yen forced them to shift their positions, contributing to market volatility.
Arindam Sandelia, co-head of global FX strategy at JPMorgan Chase, told Bloomberg TV in an interview that the reverse spread trade, or “carry trade,” still has more crashes to come, although he expects future crashes to be more regular.
A reverse spread is a strategy in which investors borrow in a currency with a low interest rate (such as the Japanese yen) to invest in assets in a currency with a higher interest rate (such as the US dollar) with the aim of profiting from the interest differential.
Recent market turmoil has been driven largely by forced selling rather than changes in investment fundamentals.
Market future
The current market situation does not necessarily point to a 2008-like crisis, according to Bloomberg. Stepek points out that while leverage can exacerbate market movements, the overall health of banks and consumers is much stronger now than it was before the 2008 global financial crisis, so while vigilance is warranted, there is no immediate sign of a systemic crisis.
Market Performance Today
-
Asian stock exchanges
- Japan’s Nikkei index rose 10.23% to 34,675 points.
- China’s Shanghai Composite Index rose 0.23% to 2,867 points.
- Hong Kong’s Hang Seng Index fell 0.31% to 16,647 points.
- India’s Sensex fell 0.21% to 78,593 points.
- The Singapore index fell 1.39% to 3,198 points.
-
European stock exchanges
- The British FTSE 100 index rose 0.323% to 8,027 points.
- The German DAX index fell 0.12% to 17,321 points.
- The French CAC index fell 0.27% to 7,130 points.
- The Stoxx 600 Composite Index rose 0.3% to 488.4 points.
-
US Stock Exchanges
On Wall Street, the main US stock indices opened higher today as follows:
- The Dow Jones Industrial Average rose 1.16 points at the open to 38,704.4 points.
- The S&P 500 rose 0.34% to 5,204.06 points.
- The Nasdaq Composite Index also rose 63.7 points, or 0.39%, to 16,263.7 points at the opening.
-
Gold, Oil and Currency Markets
- Gold fell 0.9% to $2,389 an ounce.
- Brent crude rose 0.9% to $76.98 a barrel.
- Bitcoin rose 4.9% to $56,507 per unit.
- Ethereum rose 3.24% to $2,536.
- The pound fell 0.63% against the US dollar to $1.2708, but rose 0.35% against the euro to €1.1626.
Investor sentiment and flows
According to Calastone Network, a global network of investment funds and fintechs, British investors pulled £207 million ($263 million) from UK-focused equity funds in July.
However, this was the lowest net selling figure since August 2021, indicating some stability in investor sentiment.
Stepek concludes by reminding us of the importance of not panicking during market volatility, as recent market action has been driven more by forced selling and market flows than changes in underlying investment fundamentals.
Stepek advises investors to remain cautious but not overly anxious, as markets adjust to new conditions.
