Recently, the global market has ushered in a &#34;turning point&#34;. In the first half of the year, the US stock market continued to soar, technology stocks surged, bulk commodities such as copper rallied, and the weak Japanese yen kept falling...
However, this week, US technology giants collectively suffered heavy losses, with the S&amp;P and Nasdaq both falling for three consecutive days. The Japanese yen saw a strong rebound, the Chinese yuan surged by 600 points, and copper fell below the $9,000 mark...
The previous &#34;hot trading&#34; suddenly experienced a major reversal. What is the logic behind this?
Analysts have different opinions on this matter. Some believe it is due to political turmoil in the United States, the &#34;Trump trade&#34; losing steam, while others think it is the market trading on the US recession, with the unfavorable start of the earnings season in European and American stock markets. The reversal of the &#34;yen carry trade&#34; is also considered one of the reasons.
Overall, the two main logics behind the storm of this turning point are &#34;recession trading&#34; and the reversal of &#34;carry trade&#34;. On one hand, weakening US economic data has raised concerns about a recession and boosted expectations of interest rate cuts. The US stock market has entered a risk-off mode, with rotation between technology stocks and small-cap stocks, and copper prices showing signs of weakness.
On the other hand, there has been a reversal in global carry trades. The sharp drop in the Nasdaq has led to capital outflows into the Japanese yen. The slowdown in the US economy combined with hawkish signals from the Bank of Japan has narrowed the US-Japan interest rate differential, increasing expectations. Crowded short positions in the yen were forced to close, leading to a rapid rise in both the Japanese yen and the Chinese yuan.
<h2>Global Market &#34;Big Turning Point&#34;</h2>
As the global market closes the first half of the year, US stocks and tech giants have been shining, with the S&amp;P up 14% and the Nasdaq hitting new highs. Bulk commodities have also rallied, with copper prices hitting historic highs. Meanwhile, the Japanese yen has been falling continuously, breaking below the 162 mark.
However, in less than a month, the market has undergone a major &#34;change&#34;, with the Japanese yen and Chinese yuan surging, while the Nasdaq and AI stocks plummeted.
Firstly, looking at the foreign exchange market, the Japanese yen has surged by 6% in two weeks, rising from a nearly 40-year low to the 152 mark, with gains against the euro and the pound.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e20da9d2-fdea-4b7b-8f6c-b83018ef009a.png/query-aW1hZ2VWaWV3Mi8yL3cvNjQw?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e20da9d2-fdea-4b7b-8f6c-b83018ef009a.png/query-aW1hZ2VWaWV3Mi8yL3cvNjQw"/>
The appreciation of the Japanese yen has boosted sentiment in Asian currencies, with the offshore Chinese yuan approaching the 7.2 mark on Thursday, surging over 600 points intraday, marking the largest intraday gain since September last year.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/9c0aedb4-9c69-4d39-8e1a-cd04d76a7b34.png/query-aW1hZ2VWaWV3Mi8yL3cvNjQw?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/9c0aedb4-9c69-4d39-8e1a-cd04d76a7b34.png/query-aW1hZ2VWaWV3Mi8yL3cvNjQw"/>
In the stock market, concerns among US stock investors about AI returns have intensified, with the Nasdaq falling for three consecutive days this week, down nearly 9% from its historical high on July 10, wiping out $2.3 trillion in market value. Popular AI concept stocks such as NVIDIA and Broadcom have been heavily sold off
The commodity market is also not optimistic. London copper fell below $9,000 for the first time since early April, dropping by about 20% from its record high two months ago, while London aluminum hit a four-month low.
In the bond market, U.S. bonds are approaching the end of inversion. On Thursday, the yield spread between the two-year and ten-year U.S. bonds was only 12 basis points, the closest to ending the inversion since mid-2022, a far cry from the over 50 basis points difference a month ago.
<h2>&#34;Recession Trades&#34; Trigger Chain Reactions</h2>
From a fundamental perspective, as economic data continues to weaken, concerns about a U.S. recession are beginning to dominate the market. On July 24-25, various assets, including gold, saw profit-taking at high levels.
China Merchants Macro believes that this indicates the market is pricing in a hard landing risk off:
<blockquote>
<ol>
<li>
The sharp drop in the U.S. ISM non-manufacturing PMI in June, coupled with slowing employment and inflation data, along with the dovish stance of the Federal Reserve, has helped push down expectations of interest rate cuts.
</li>
<li>
Statements from Federal Reserve officials further strengthen expectations of rate cuts. Former &#34;number three&#34; at the Federal Reserve, who served as the New York Fed chairman from 2009 to 2018, Dudley, changed his stance from advocating for high rates to calling for rate cuts this month.
</li>
<li>
Disappointing European PMI data also raised concerns about a recession. Germany's July PMI unexpectedly fell, and the initial value of the Eurozone manufacturing PMI hit a 7-month low.
</li>
<li>
The reflexivity of global financial markets has reinforced interest rate cuts and even recession trades.
</li>
</ol>
</blockquote>
With weak U.S. economic growth and risk aversion spreading, U.S. stocks have plummeted one after another, putting immense pressure on the metal market. Investors who previously bought copper due to concerns about supply shortages and rising demand from data centers are now worried about increasing inventories and slowing demand.
Speculation about the Fed's interest rate cuts continues, leading to a clear shift in U.S. stock styles. As expectations of Fed rate cuts heat up, U.S. small-cap stocks have finally turned the tables, with funds flocking to the Russell 2000 index while the heat around tech giants has noticeably cooled off.
<h2>&#34;Arbitrage Reversal Trades&#34; Trigger Impact</h2>
From a trading perspective, the reversal of yen carry trades is causing a massive &#34;liquidation&#34; globally, with assets that performed well in the first half of the year experiencing significant reversals.
The Nasdaq's sharp decline has caused significant market volatility, especially with the unwinding of leveraged positions, coupled with the speculation of a narrowing U.S.-Japan interest rate spread. With various factors at play, global carry trades have reversed dramatically, forcing yen shorts to cover their positions.
Furthermore, the yen's appreciation has boosted sentiment in Asian currencies, with high-yield currencies like the Australian dollar taking a hit. Both the Chinese yuan and the yen are currently low-yield funding currencies. As carry trades reverse, yen shorts are covering their positions, and yuan shorts are accelerating their unwinding.
Analysis indicates that USD/CNY has been trading sideways for too long, with low actual volatility. After quickly breaking through the key levels of 7.25 and 7.23, triggering a stampede of short covering, the market has accelerated its decline
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/94a7b09d-849a-46d7-b6e6-11b75ecd39e9.png/query-aW1hZ2VWaWV3Mi8yL3cvNjQw?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/94a7b09d-849a-46d7-b6e6-11b75ecd39e9.png/query-aW1hZ2VWaWV3Mi8yL3cvNjQw"/>
<h2>Controversy Arises Over &#34;Chaos&#34; Performance</h2>
It is worth mentioning that the recent market turmoil has sparked controversy and discussions.
Zhongjin's Liu Gang believes that the recent market turmoil does not quite resemble &#34;recession trading&#34;:
<blockquote>
If it were a recession trade, U.S. bond yields should have declined, and gold should have surged. These two are the most beneficial assets in a recession. However, the result is that gold plummeted, U.S. bond yields rose instead, and the U.S. does not have much recession pressure or signs.
</blockquote>
CMB Macro, on the other hand, believes:
<blockquote>
The profit-taking at high levels in various assets, including gold, indicates that the market is pricing in a hard landing risk off. Although U.S. bonds have not reflected multiple rate cuts, if data continues to weaken, the increasing certainty of a recession will inevitably lead to more rate cuts.
</blockquote>
Regarding the sharp drop in U.S. stocks, some analysts mentioned &#34;expectations.&#34; U.S. stocks had accumulated significant gains, which were already high, and the current market sentiment of concerns about AI returns spread. Disappointing performances from Tesla and Google also contributed significantly to the decline.
Furthermore, the recent volatility in the U.S. market due to the election has also brought about fluctuations. Trump recently criticized the strong U.S. dollar and expressed dissatisfaction with the depreciation of the Chinese yuan and Japanese yen. Analysts believe that this stance boosted the sharp rise of the Japanese yen. Some analysts also mentioned that Harris's popularity increase led to a reversal in Trump's trading, easing some pressure on the depreciation of the Chinese yuan.
Although there is controversy surrounding the analysis of this &#34;storm,&#34; it is undeniable that predicting the next market trend is becoming more complex!

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Recently, there has been a major turnaround in the global market, with US tech giants suffering heavy losses and the Japanese Yen and Chinese Renminbi sharply rising. The main reasons for this turnaround are twofold: the reversal of recession trading and arbitrage trading. Recession concerns and expectations of interest rate cuts have boosted US economic data, leading to a risk-off mode in the US stock market. At the same time, there has been a reversal in global arbitrage trading, with funds flowing back to the Japanese Yen, leading to a sharp rise in the Japanese Yen and Chinese Renminbi. This turnaround is of significant importance for the global market

Understand the "big changes" in the global market with one article!