The aftershocks of "Black Monday" have not yet dissipated! Is it the next trigger for a market crash?

Major investors expect the stock market crash that started this summer to continue into the fall. They are concerned that following the unexpected monetary policy moves by the Bank of Japan and worries about the U.S. economic recession, a more widespread wave of selling will follow. Earlier, a sudden reversal in a large number of stocks and arbitrage trades triggered a vicious cycle of price declines, volatility, and hedge fund selling. However, this situation has eased somewhat, with global stock markets rising nearly 2% this week. Nevertheless, asset management companies overseeing investments worth billions of dollars indicate that they are more likely to continue selling stocks rather than buying them back. This is due to signs of weakness in the U.S. job market and global consumption trends, lowering the threshold for market volatility. The "buying on dips" mentality that investors used to have during sell-offs has been replaced by fear. Mahmood Pradhan, former Deputy Managing Director of the IMF and Global Head of Macroeconomic Research at Amundi, Europe's largest asset management company, said, "This is not just a major financial market accident, perhaps we could describe it that way last week. The situation is more widespread than that." He expects investors to remain cautious. According to data from Bank of America, these investors have already reduced their stock positions and are increasingly moving more funds into cash. Michael Kelly, Multi-Asset Manager at PineBridge Investments, which manages around $170 billion in client funds, is one of the investors reducing stock positions and may further reduce them. He said, "The market will be very, very unstable in the next two months. The expected rate cut by the Federal Reserve next month may be too late and may not be able to save the economy." Currently, investors' expectations for global economic growth have fallen to an eight-month low. Stock market crash and government bond rally are signals of economic recession What will trigger the next sell-off? A weak U.S. jobs report and the unexpected rate hike by the Bank of Japan triggered a global stock market sell-off. Hedge funds related to volatility and trends have been exiting, and anxious investors are flocking to government bonds. The rate hike by the Bank of Japan destroyed arbitrage trades worth billions of dollars that had made substantial profits. In these trades, speculators borrowed yen at low prices to purchase high-yield assets like U.S. tech stocks. J.P. Morgan estimates that about 70% of these arbitrage trades have now been unwound, but the flow of funds related to yen positions is difficult to measure. Pradhan from Amundi said that the possibility of further unwinding is making people very risk-averse. Bets against the yen are consistent with the rise of the Nasdaq 100 index, and investors fear more related impacts to come UBS European Stock Strategy Director Gerry Fowler said that the selling pressure from hedge funds may have ended, but mainstream investment managers who act more slowly typically need 4 to 6 weeks to adjust their portfolios. Marie de Leyssac, Multi-Asset Portfolio Manager at Rothschild Investment Partners, stated that these fund managers may be the next sellers, but they will sell based on economic data. While she believes that the US economy is unlikely to slow significantly, she has not bought stocks but prefers put options, which provide protection in case of a market downturn. Goldman Sachs strategist Scott Rubner stated in a report that pension funds will further reduce their equity exposure and shift towards fixed income, adding that since 1950, the second half of September has consistently been the worst-performing period on Wall Street. Key Indicators Still Issuing Warnings! Paul Eitelman, Chief Investment Strategist at Russell Investments, stated that another weak US jobs report could trigger new volatility. Federal Reserve Chairman Powell will speak at next week's Jackson Hole central bank symposium, and the earnings report from AI giant NVIDIA (NVDA) on August 28 are both risk events. "Even if you think it makes sense fundamentally to increase exposure, volatility can make it difficult to do so," said Arun Sai, Senior Multi-Asset Strategist at Pictet Asset Management. This is because risk management departments of fund managers often prevent them from buying stocks when prices are experiencing significant fluctuations. The VIX, which measures expected volatility in the S&P 500 index, and its European counterpart V2TX hit multi-year highs last week before easing slightly, but these indices are still issuing warning signals. US stock market volatility since 1919 VVIX is another options market indicator that rises when traders expect the VIX itself to be volatile, and it is currently trading above 100, indicating that the market's frenzy is not over yet. Stuart Kaiser, Head of Equity Trading Strategy at Citi, said: "You should pay close attention to it until you see VVIX drop below 100, it is a key indicator at the moment."