Global stock market meltdown: What caused it, who escaped it and who didn't? (2024)

In a live Q&A on the Markets Today blog, we asked experts from across the newsroom for their analysis of this week’s market volatility.

Here is a lightly edited transcript of the conversation.

Kicking off with a simple one: What caused the global stock market meltdown?

Here’s: Abhishek Vishnoi, Bloomberg’s Senior Asia Equities Reporter:

“The meltdown, which had erased trillions of dollars from global equities, is deeply rooted in fears of a deeper U.S. economic slowdown and a historic shift in Japan’s interest rates and violent rotation away from heavyweight tech stocks due to their high valuations.

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The flight to safety has intensified after weak U.S. economic data spurred concern that the Federal Reserve may have been behind the curve in cutting rates and will now likely need to ease monetary policy aggressively to head off a recession.

Geopolitical tensions in the Middle East have further added to the cautious sentiment as Israel braced for a possible attack from Iran and regional militias in retaliation for assassinations of Hezbollah and Hamas officials.”

How does the meltdown compare to the 1987 Black Monday crash?

Michael Msika, Senior European Stocks Reporter:

“It’s a different situation. First of all, outside of Japan, which experienced one of its sharpest declines in history, the damage was nowhere near 1987 and has different reasons.

The context matters. First, markets hadn’t had a real correction for a while. Second, the latest rally was characterized by major crowding into just a few trades: long big tech and long Japanese stocks, as well as short Yen were some of the most crowded trades. Economic growth worries accelerated the unwind of carry trades that had started with the interest rate hikes in Japan and the surge in the Yen. It triggered a collapse in Japanese stocks, which are very sensitive to the Yen and to global growth.

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The problem when everyone has built similar positions and starts losing money, they tend to unwind them at a fast pace, creating a snowballing effect. All this was exacerbated by trading algorithms, systematic strategies and option hedging. Overall, if you add the lower liquidity of the summer months, you end up with astonishing moves like we just had.”

Who has hit hardest, and who escaped?

Abhishek Vishnoi:

“Asia was particularly hit hard as Japan became the epicenter of the global selloff on Monday. Meanwhile, the unwinding of the yen carry trade — where one borrows cheap yen to finance buying of higher-yielding assets — made US technology stocks, and the tech-heavy markets like Korea and Taiwan among the worst hit.

The benchmark Topix index and the Nikkei 225 Stock Average each sank 12% on Monday, their steepest declines since the Black Monday crash in 1987.

On the flipside, shaken by a surprise unwinding of the yen carry trade and repricing of a probable US recession, the investing world has begun to take a deeper look at Asian emerging markets that are under-owned by foreigners.

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Equities in China, India and parts of Southeast Asia are emerging as the winners in the new normal made after Japan led a global crash and a subsequent rebound that triggered circuit filters in some markets on the way down and back up last week.

While the S&P 500 Index has fallen 2.8% since last Friday’s poor US jobs data triggered the selloff, Chinese shares have shed merely 0.6%. Indian and Malaysian stocks are up 1% and 3.6%, respectively, during the period.”

Why was Japan the epicenter of this volatility?

Kana Nishizawa, Japan stocks editor:

“There’s no single reason that explains the volatility, but there are several triggers that analysts point to that made Japan especially vulnerable.

First, the Bank of Japan’s interest rate hike and its hawkish messaging on July 31 pushed the yen higher. The belief among some people that rates will stay low for longer and the yen will remain weak was broken, causing an exodus of investors who had bet on that trade. Japanese stocks had been one of the best-performing major markets this year, with benchmark indexes hitting record highs in July. That also made the market more prone to profit-taking.

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Second, weak US jobs data ignited fears that the country’s economy is in a downturn. Japan’s stock market is sensitive to global economic cycles due to dominance of exporters. It’s also very liquid with a high proportion of foreign investors — so stocks can be easily sold off when there’s concern over the global economy or political instability.

Third, there were many retail investors who had bought Japanese stocks with borrowed funds. The market selloff last week likely triggered a wave of margin calls, forcing them to close their positions as their value of collateral shrunk — unless they had enough extra cash to cover the difference. That exacerbated the rout, with selling causing more selling.”

What strategies do traders employ when markets crash?

Marcus Wong, Emerging Markets Macro Strategist:

“Traders have turned to the traditional havens during this month’s market turmoil, with Treasuries, the yen and the Swiss franc all being major beneficiaries.

The risk-sensitive commodity currencies such as the Aussie dollar and Norwegian krone were sold off instead. While the US dollar is generally favored during market turmoil, the still-higher US rates also means dollar carry remains exceptionally attractive, especially compared to many G10 peers which have begun easing rates.

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Interestingly, gold was sold down instead. During periods of intense market dislocation, it appears that some traders are forced to cover their unexpected margin calls — which sees traders liquidating their gold positions.”

How crucial was the U.S. jobs report to the meltdown?

Michael Msika:

“The jobs report was one piece of the puzzle. The accumulation of bad news is responsible.

US job openings had indicated signs of weakness in the job market for some time but not enough to create worries. From a macro economic perspective, evidence of weaker growth momentum had been building for a while in Europe and China, and the employment report fueled worries that the US would soon join the slowdown. It created some fear that central banks might have been too slow to cut interest rates in order to prevent a recession. That has switched investors mood to a “bad economic news is bad market news situation,” and that central banks might not be able to offset it.

Some earnings disappointments for large cap tech stocks in the US had also started to dent sentiment in July.”

Is this an early sign of a U.S. or global recession?

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Simon White, Macro Strategist:

“The recent market turmoil has no impact on the the US economy as it stood beforehand, i.e. it is slowing, but there is a low chance of a recession in the next 3-4 months. But if there is further market volatility ahead, it could soon feed into the real economy and that would make a near-term recession more likely.”

Alice Gledhill, European Bonds Reporter:

“Recent market moves certainly show investors are suddenly a lot more nervous about the state of the global economy.

It’s hard to overstate just how huge the price swings have been in recent days, as traders dumped riskier assets like stocks and piled into safer assets like US Treasuries. In the space of just two trading sessions, the yield on the US two-year note tumbled from about 4.30% to 3.65%, though it’s since reversed part of that move. Traders are also pricing more extensive interest rate cuts than they were just weeks ago, implying they think policymakers will have to swiftly ease policy to ease pressure on economies pummelled by high borrowing costs.

It’s still hard to say whether a global recession is on the cards. But moves in the yield curve — the difference between yields across different maturities of bonds — may suggest a US downturn is round the corner, which would have a knock-on impact on other economies. For the past two years, two-year yields have been higher than 10-year ones, an anomaly that briefly corrected earlier this week in what’s called a disinversion of the curve.

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Many investors take that as a sign that recession is imminent because it’s a sign that interest rate cuts are close, which drags down near-term yields.”

What were some of the early signs of a market meltdown?

Simon White:

“Meltdowns are like a dune of sand collapsing. Eventually just one added grain will cause the collapse, but it’s impossible to know in advance which one it will be. In this case, it was the BOJ hiking rates last Wednesday.

The rise itself was small but it was enough to convince the market that the yen would start to get stronger.

That in turn cause stocks and bonds around the world to destabilize such that when two days later US jobs data came in little weaker than expected, it was enough to trigger much more serious falls in global asset prices.”

Kana Nishizawa:

“Even before the recent rout, though, there was some nervousness with the market coming off its highs as US tech stocks — which helped power the stocks rally — got hammered after their earnings failed to meet high expectations. The buildup in retail investors’ leveraged positions was also being seen as a risk.”

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Were there any surprises from the meltdown?

Michael Msika:

“The laggards of the year were relatively spared or even benefited as some rotation out of the most crowded assets into other parts of the market was visible.

Chinese developers and the Yuan benefited. Europe and China had been shunned by investors for some time, with reduced exposure to Europe since the European, and then French elections, and to China since May. Gold didn’t benefit from its haven status. The most impressive move was seen in the US volatility index VIX, which had its biggest intraday jump on record before paring; while a rise in volatility wasn’t a surprise, the magnitude of the move was totally unexpected.”

We’ve seen a rally in stocks since Monday, are the problems over?

Abhishek Vishnoi:

“Japan has led a rebound in risk assets globally since Monday’s rout amid signs the selloff was overdone and after the Bank of Japan signaled it will refrain from hiking interest rates when markets are unstable.

Japan stock gauges have retraced more than 70% of Monday’s loss and aided similar rebounds in North Asia’s tech-heavy markets, putting the Asian equity benchmark on course to potentially recoup the entire loss.

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Still, the macro regime and the playbook has changed a bit for at least the developed markets and tech stocks, both anchors of global risk assets in recent years. At the heart of the relentless pressure are rising odds the US economy tips into a recession by the end of this year and expectations about where the BoJ’s interest rates will ultimately land.”

Simon White:

“It’s too early to say. Market selloffs typically come in waves like pandemics. Some calm has returned for now, but there may well still be some pain out there that could precipitate further market declines.”

What stopped the meltdown?

Marcus Wong:

“Following the weak U.S. jobs print on Friday that spurred the selling, it appeared that a stronger-than-expected July ISM services print provided some positive feedback on the economy.

Sentiment was later buoyed again after BOJ’s Shinichi Uchida said that the central bank will refrain from hiking interest rates when markets are unstable. That said, the meltdown could have also stalled due to market exhaustion — and investors looking for a catalyst to either buy or sell further.

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Markets are still very jittery, with few appearing bold enough to call a bottom on the market just yet. With U.S. labor markets in focus, weekly US jobless claims due Thursday should be garnering a lot of attention.”

What’s happening in Japanese markets now?

Kana Nishizawa:

“The market has calmed, at least for now, after some violent swings at the start of the week.

After Monday and Tuesday’s swings, intraday moves have been less than 5%.

While some banks like UBS cut their forecast for Japanese stocks, many large investors have remained bullish on the outlook for the long term and central bank comments seem to have eased investor concern. Some technical indicators are showing signs that the worst may be over for now.”

Was the selloff driven by unwinding of very popular trades, and do you see other crowded trades that could also be at risk?

Abhishek Vishnoi:

“The recent correction was definitely a blow up of crowded trades, but the intensity of the stock market selloff and then the subsequent rebound indicates traders have already established a short-term bottom.

What remains to be seen is whether this risk-off that started with the most-crowded sectors/themes broadens out. The odds of that happening are on the lower side at the moment as markets have started rebounding from oversold levels.

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Still, one very crowded trade of selling China equities may see some unwinding in current circ*mstances, implying some relief for battered Chinese stocks. Some money managers may relook to enter a market, which has little correlation with the US equities, is extraordinarily cheap and is thinly owned by foreigners.”

Can the meltdown be partly blamed on the U.S. Federal Reserve failing to decrease interest rates?

Greg Ritchie, European Bonds/FX Reporter

“Investors love to blame the Fed for why their portfolios are in the red, but ultimately these jitters come down to an array of factors including the unwind of yen carry trades and some markets that were priced close to perfection.

You can argue that the Fed should have started cutting by now for legitimate economic reasons, but the recent price action is more complex than that.

What’s more, while fast-paced, the moves in US markets are not yet sizable enough for Fed officials to worry about. As the central bank official Austan Goolsbee said earlier this week, markets are much more volatile than Fed actions.”

Are things really that bad in the economy? The growth outlook seems to be okay.

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Sam Unsted, Markets Today:

“The short answer to this is no. There have been signs of a softening in the US economy and the consumer environment showing through, not just in the broader data but also in reporting by companies like McDonald’s and Starbucks. But there hasn’t been anything as yet to indicate that the US is about to fall into a sharp recession, just that growth is starting slow.

However, that’s not what matters when markets are positioned as they are. Investors have been piling into big tech stocks, for example, on the promise of AI. Essentially, you then have a lot of investors betting on everything going in the same direction. A slowdown in US growth undercuts that narrative because it may mean the spending by clients on AI software or hardware will be pulled back. Not disappear, but maybe less spending than had been hoped for.

So while the AI story is still a global megatrend and the US economy is still in reasonable, if marginally less healthy shape, those changes to the underlying narrative have to be priced in. And because you have a very crowded trade in tech stocks, the moves in stocks are then more violent than the fundamental story about the economy might indicate.”

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We’ve also had a number of questions on what this meltdown means for bitcoin and other crypto assets. What’s the story there?

Emily Nicolle, Crypto Reporter:

“The unwinding of the carry trade for Japanese yen hit cryptoassets just as hard as global stocks (if not harder, given the former’s natural inclination for volatility). On Monday, Ether experienced its steepest one-day drop since late 2021, and Bitcoin lost some $170 billion off its total circulating value at one point. In short, anyone thinking that crypto had managed to reclaim some independence from correlating with traditional markets was proved wrong.

One of the most popular long-running Bitcoin narratives in crypto circles is its reputation as a form of “digital gold,” which views the asset as a hedge against inflation and a safe haven in times of turmoil elsewhere. The fact that its price fell more than 16% on Monday hampers that idea.

As a result, some analysts have proposed that Bitcoin should be seen as more of a “venture-like bet” that it might trade like gold in future — meaning that in the present day, we should expect both higher risk and a chance at greater profit. For the moment, that’s unlikely to appeal to the institutions and governments whose involvement is required to take Bitcoin and other cryptoassets mainstream.”

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A lot of readers are asking about the yen carry trade. What is it and why did it matter so much?

Marcus Wong:

“Due to Japan’s previously ultra-dovish monetary policy, it was popular to borrow in the yen, while investing into higher yielding currencies such as the Mexican peso, Brazilian real or the Turkish lira. This was a popular trade not just among institutional investors globally, but even mom-and-pop traders in Japan. When the BOJ first hiked rates in March, the reaction in the yen was still fairly muted — hence the yen funded carry trade still looked popular.

But the sudden rally in the yen has upended the trade, and has still investors rushing to unwind this position — leading to further gains in the yen, and a tumble in currencies such as the MXN. But some investors believe this unwinding isn’t yet done, with JPMorgan’s Arindam Sandilya opining this week that the unwinding is only between “50%-60% complete.”

How did commodities like oil and gas perform this week, and what does the future look like for these commodities?

Sam Unsted:

“Oil prices were caught up in the selloff on Monday. When you have a move in assets with the breadth that we saw then, and when economic growth concerns are part of the melee, few assets will escape totally unscathed.

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However, things have quickly moved back to the fundamentals — tensions in the Middle East, the supply outlook from OPEC+. That’s meant that oil has mostly regained the ground lost and prices aren’t moving much today either, whereas stocks are still on their rollercoaster ride.”

What are the expectations for both shares of Nvidia and SMCI? Is there any probability to return back to their peak that they achieved this year?

Sam Unsted:

“Certainly analysts remain very positive on the outlook for Nvidia shares, in particular. It’s the leading player in an AI market that’s growing rapidly. Among those tracked by Bloomberg, they still see another 43% of upside, based on their target prices. Super Micro, a smaller player, isn’t seen getting left out either — analysts see 50% upside there. Like I wrote earlier, the AI story isn’t going anywhere.

What we’ve seen this week is effectively markets getting closer to a more rational view of the benefits that AI will reap for these companies, prompted by those jitters about economic growth. Often, when there’s a global trend that gets investors excited, there will be an overheating as everyone piles in, then a correction as the realisation dawns on how quickly this will actually occur. That’s partially what was seen on Monday, with the focus now moving to how much growth the companies are actually delivering and how much is to come, rather than unbridled, to the moon optimism. There could be more of that shakeout ahead.”

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Should we expect more volatility in the coming day/weeks? How will we know when it has eased?

Marcus Wong:

“Yes, that would be a safe assumption to make. While markets have pared back odds for an “emergency” rate cut from the Fed, the big debate in the market right now is the odds of a recession this year. JPMorgan this week has increased the probability of a recession to 35%, from 25% odds previously.

With markets on the edge following the US NFP numbers, expect extra scrutiny on incoming US jobs and inflation data — which could trigger further wild swings. This swings could be more exaggerated on thin liquidity during the August summer month, and remain elevated ahead of the September FOMC decision.

In terms of judging when the volatility is over, Wall Street’s famous “fear gauge” would be the VIX Index, which measures the 30-day implied volatility of the S&P 500. On Monday it surged to the highest since the peak of the pandemic in March 2020. Although it has eased, VIX levels are still close to double the one-year average. While markets have calmed down from Monday, it is still fairly elevated compared to the recent trend. Other risk barometers could be the Aussie-yen pair, with further gains signaling that sentiment is improving.”

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Simon White:

“When markets are as volatile as they are today, levels are unlikely to be respected. Nonetheless the VIX over 40 was very extreme, and if it went back over that level it would be a clear indication the meltdown is not done yet.”

What’s the outlook for central banks after the meltdown?

Greg Ritchie:

“Money markets are still betting on over a percentage point of monetary easing from the Fed over the remainder of this year. Given there are only three more scheduled rates decisions, that implies at the least one half-point cut alongside two quarter-point decreases.

That outlook is more aggressive than the European Central Bank, where traders are betting on three quarter-point cuts. That said, once you factor in the ECB already cut rates by that amount in June, the Fed is playing catch up.

For the BOE, only two quarter-point cuts are priced over the three remaining 2024 meetings as traders bet rates will remain relatively lofty. That’s amid ongoing worries about the persistence of price pressures. Earlier today two separate surveys indicated Britain’s employers stepped up hiring for white-collar roles and permanent staff, pointing to upward pressure on wages that BOE officials worry may feed inflation.”

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We’ve had a question for Mark Cudmore, TV contributor and Executive Editor for Bloomberg’s Markets Blogs about the outlook for Japanese stocks. Here’s his take.

“The outlook for Japanese stocks isn’t great, and it is likely they will revisit the recent lows at some point over the coming months.

A repetition of Monday’s panic-selling is very unlikely, but many of the core reasons for buying Japanese stocks have been undermined:

• The yen is ~10% stronger than it was a month ago, which is a blow to exporters, never mind that the significant increase in FX volatility is a material cost to trade.
• There was a belief that the Bank of Japan would carefully and smoothly normalize policy under Governor Ueda, which would be a positive for the financial system and the economy. That belief sustained through the interest rate hike last week and until the related press conference began several hours later. It was only in that press conference that such optimism was shattered, as Governor Ueda expressed surprising hawkishness, pointing to a strong domestic consumer and a weaker currency to justify his stance. There’s weak evidence for the former, which severely undermined his credibility, while the latter being a motivation means a less supportive stance for exporters in the future. Given the subsequent market fallout, it will be hard to reignite investor enthusiasm to give policymakers another chance.

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The fundamental backdrop is that the country has not escaped decades of stagnation — Japan has the slowest growing major economy in the world again in 2024 — and now the central bank has aborted take-off just when conditions seemed amenable.

While the stock market is now discounted after the selloff, it doesn’t stand out as cheap compared to the many other stock markets worldwide that have also lagged the US tech-fueled bull market of the past 15 years. Sure, there’s a corporate reform story, but it’s slow-paced and the policy toward immigration means that demographics aren’t supportive.”

Finally, here’s the key question: What should we be watching out for next?

Marcus Wong:

“The market has started to correct with this week’s selloff. Whether this correction will continue will largely depending on the likelihood of a US recession, and positioning. On the latter, Citigroup strategists noted earlier this week that they would feel more comfortable buying into weakness once there is more “evidence of a complete positioning unwind”.

As such, there is still a propensity for a further selldown if there is more signals that the US economy is screeching to a halt. While there is hardly a consensus in the market that the US economy is headed into a recession this year, investors are so jittery that even “small speedbumps” in the economy now could be another reason to sell. “

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Greg Ritchie:

“Believe it or not, but we’re meant to be in the middle of a summer lull for global markets. That means we aren’t expecting a wave of commentary from central bankers, with the next major decision not due until over a month when the ECB meets.

For now focus is on positioning, with lesser liquidity potentially exacerbating moves. The most closely-watched data will continue to be from the US, where jobs market figures may take precedence given growing recession fears.”

— With assistance from Kana Nishizawa, Abhishek Vishnoi, Marcus Wong, Simon White, Greg Ritchie, Michael Msika, Alice Gledhill, Emily Nicolle and Mark Cudmore.

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