Global financial market trends have taken a sudden turn! Virtually all major asset prices are falling overnight.

Amid uncertainty in interest rate prospects and geopolitical risks, the three major U.S. stock indices continued to correct on Wednesday, local time, with the Nasdaq falling by more than 1%, the S&P 500 experiencing a four-day losing streak, and the Dow Jones suffering eight consecutive days of decline.

This is due to Federal Reserve Chairman Powell's complete shift, sending the most explicit signal to date to postpone rate cuts on the 16th. His remarks continue to push up U.S. Treasury yields and the U.S. dollar index, with U.S. stocks falling for three consecutive weeks and the U.S. dollar index standing above 106 after five consecutive daily gains.

The market currently widely expects the Fed to cut rates for the first time in September, previously in June—now this bet has plummeted to less than 20%, and there is no certainty whether there will be a second rate cut for the whole year. This completely overturns the bets that were still very popular in the first quarter, "at least 3 rate cuts within the year," leading to a sharp drop in popular U.S. and Japanese stock markets, a strong U.S. dollar making a comeback, and causing pressure on the Asia-Pacific foreign exchange market. The yen against the U.S. dollar once fell to a 34-year low, and this week the Chinese yuan against the U.S. dollar midpoint broke through 7.1 for the first time in nearly three weeks, and the offshore yuan also once touched 7.28.

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Several overseas institutional investment managers and traders interviewed by First Financial Media said that with the reversal of expectations, the correction of risk assets such as U.S. and Japanese stocks may continue, and it is difficult for the strong U.S. dollar to reverse in the short term; Goldman Sachs also mentioned that although the institution still expects U.S. inflation to ease, the expectation is that the Fed's rate cut cycle will be shallow, and coupled with improved forward-looking growth indicators, this will also lead to the postponement of the easing cycle of central banks in emerging markets such as Southeast Asia, as central banks in emerging market Asia may wait for the Fed to cut rates first.

At present, several international investment banks believe that China's policy support may only be introduced if economic data further weakens, and there may be constraints on further reductions in MLF rates.

"Rate cut trading" has cooled down

Powell said on Tuesday that the stickiness of inflation has weakened the central bank's confidence in cutting rates in the near term, stating that high interest rates will be maintained for longer than expected. The Fedwatch tool shows that the expectation of a rate cut in June is only 16.3%. The expectation for a rate cut in September is relatively high, approaching 71.9%, and the next Fed meeting will be in November, that is, during the U.S. election period. The market still expects that the Fed will at least symbolically cut rates once before the election.

Recent economic data does not support rate cuts. First, the U.S. job market is currently strong. Non-farm employment data has grown for 39 consecutive months, the fifth-longest consecutive growth on record. In March, 303,000 new jobs were added, and the unemployment rate fell to 3.8%.

Second, this year's inflation data has stopped falling. In March, the core CPI year-on-year growth rate did not fall to 3.7% as expected, but remained unchanged from February at 3.8%, and the month-on-month growth rate also remained at 0.4%; the overall CPI year-on-year growth rate rose sharply from 3.2% in February to 3.5%, higher than the market's expected 3.4%.Additionally, consumer spending accounts for nearly seventy percent of the United States' GDP. The latest March "scary data" (retail data) has exceeded expectations, with retail sales increasing by 0.7% compared to February without adjusting for inflation, reaching a new high since September last year. The US dollar quickly jumped, and the Japanese yen and South Korean won both hit new lows in stages.

It is against this backdrop that Powell's attitude has turned completely. Industry insiders told reporters that the resilience of the US economy has made it difficult to eliminate upward pressure on inflation, giving the Federal Reserve more room to observe. The Fed is concerned about making a mistake by lowering interest rates too early.

As early as the high inflation period in the United States in the 1970s, the Federal Reserve raised interest rates in the hope of controlling inflation, but raising interest rates led to an increase in unemployment. At that time, the Federal Reserve's misunderstanding of economic data was that "high unemployment is unnatural and the economy needs to be rescued," leading the Federal Reserve to lower interest rates too early, which in turn led to inflation soaring into double digits again. It was not until Federal Reserve Chairman Volcker took the stage and launched aggressive interest rate hikes again that the "inflation tiger" was successfully suppressed, with interest rates reaching a peak of 19.1% at the time.

At that time, this double inflation dealt a heavy blow to the US economy, leading to two recessions in the United States and a large number of business failures (with 52,000 businesses failing in 1984 alone), and the unemployment rate soared to 10%. Powell, Yellen, and others have experienced the period of high inflation at that time, which is also one of the important lessons in the history of the Federal Reserve. Therefore, they are now more cautious to avoid making the same mistakes again.

Overseas popular stock markets have pulled back significantly.

With the reversal of the "interest rate cut trade" and the continued concerns of investors about the intensification of the situation in the Middle East, there are concerns that Israel is preparing to retaliate against Iran's retaliatory attacks last Saturday, and popular stock markets have fallen into significant consolidation, especially in the United States and Japan, which have rebounded nearly 40% since last year, with US stock valuations at a high level.

After repeatedly setting new historical highs, the S&P 500 Index has now fallen for three consecutive weeks. On Monday (15th), the index broke through the important support range of 5103 to 5143 points that had been in effect. Since then, the index may continue to fall to the psychologically significant 5000 points. Since the beginning of this year, the S&P 500 has been strong, and it has recently broken through 5200 points.

"The long-term support range is between 4795 and 4817 points. This area marks the highs of the previous two years. Looking up, the key resistance is now the broken support range of 5103 to 5143 points. It is now necessary to see a close above this area to re-form a bullish sentiment." Fawad Razaqzada, a senior market analyst at Gain Capital Group, told reporters.

It is worth mentioning that the concentration risk of US stocks is becoming more prominent. Last year, the "seven giants" technology stocks (Microsoft, Apple, Nvidia, Alphabet, Meta, Tesla) fluctuated roughly synchronously, but since 2024, the individual differences between these giants have become more apparent, with the "latecomers" Apple and Tesla continuously falling. Considering their huge market value, this also means that the overall US stock market may be under pressure.

Schroders told reporters that the valuations of global major stock indices are not attractive, especially in the United States. At the beginning of 2024, the forecasted price-to-earnings ratio of the S&P 500 Index was about 21 times, nearly 20% higher than its 15-year median. Currently, the cyclically adjusted price-to-earnings ratio of US stocks (31 times) is 22% higher than the average level since 1990, reflecting that the future returns of US stocks will decline. Other regional stock markets face lower obstacles because the average cyclically adjusted price-to-earnings ratio of other global regions (15 times) is slightly lower than the recent historical level.The recent pullback in the Japanese stock market has also shocked a host of bullish investors. Due to the U.S. retail sales data exceeding expectations, coupled with tensions in the Middle East, investors have turned to safe assets, and Japanese technology stocks have also faced significant selling pressure in a single day, with the Nikkei index plunging by more than 2% at the beginning of the week. As of the close on April 18, the Nikkei 225 index stood at 38,054.5 points, having corrected by as much as 7.4% from its previous high of 41,087.75 points.

StoneX's senior strategist, Scott (David Scutt), told reporters that with the Japanese yen continuously hitting new lows, there is no ruling out the possibility of the Bank of Japan intervening. A stronger yen could exacerbate the already steep pressure on the Nikkei 225 index, especially if the weakness in the U.S. technology stock sector spills over into the Japanese stock market. If the downward trend continues and closes lower, 37,000 points is the first downside target, followed closely by 35,700 and 35,280 points.

Asia-Pacific foreign exchange market under pressure

Due to the resurgence of the strong U.S. dollar, non-U.S. dollar currency markets suffered a heavy blow this week, with concerns about the euro falling below parity with the U.S. dollar resurfacing. The Asian foreign exchange market also suffered a Waterloo - the yen, won, Indian rupee, Indonesian rupiah, Thai baht, and Philippine peso all experienced significant declines.

Starting on April 15, the downward trend began to intensify. The euro fell for five consecutive days, closing at 1.0624; the U.S. dollar/yen accelerated upward, closing above the 154 mark, with bearish sentiment on the yen continuing to rise to the highest level since the financial crisis, as the market and the Bank of Japan's game continues; the won/dollar exchange rate briefly broke through the 1,400 won mark on the 16th, probing this level for the first time in about 17 months; on the 16th, the renminbi/dollar midpoint also entered the 7.1 range for the first time since March 22, with the U.S. dollar/CNH briefly breaking through the 7.28 mark.

At this juncture, following the first-ever trilateral meeting of financial leaders from the U.S., Japan, and South Korea, the three countries issued a joint statement on April 18, agreeing to maintain close consultations on foreign exchange market fluctuations. They acknowledged the serious concerns of Japan and South Korea regarding the recent significant depreciation of the yen and won. Meanwhile, central banks from China, Japan, South Korea, the Philippines, and Indonesia collectively stepped in to manage expectations in the foreign exchange market.

On April 18, the Study and Leadership Group stated that, in terms of exchange rates, it is necessary to adhere to the market determination of the renminbi exchange rate while resolutely correcting pro-cyclical behavior, preventing exchange rate over-adjustment risks, preventing the formation of one-sided consistent expectations and self-reinforcement, and maintaining the basic stability of the renminbi exchange rate; the Governor of the Central Bank of the Philippines stated that the decline in the peso is not sufficient to affect policy, and the issue is not the weakness of the Philippine peso, but the strength of the U.S. dollar. The core scenario is a rate cut in the fourth quarter; if the situation worsens, the rate cut may be postponed to the first quarter of 2025; the Chief Cabinet Secretary of Japan, Yoshimasa Hayashi, stated that he is closely monitoring foreign exchange fluctuations and is ready to take comprehensive measures.

In comparison, the renminbi exchange rate and the performance of A-shares have been relatively stable. Although the U.S. dollar/renminbi midpoint fell into the 7.1 range for the first time in three weeks on Monday of this week, the counter-cyclical factor shadow variable reached -1,459 points (strengthening the renminbi compared to the model's predicted value), which is enough to see the central bank's intention to stabilize, and the current U.S. dollar/renminbi exchange rate is still trading below the key level of 7.24. Several traders mentioned to reporters that recently, the central bank has maintained the stability of the renminbi exchange rate through various means, such as suppressing foreign exchange swaps in the domestic market and moderately tightening the liquidity of the offshore renminbi market.

Compared to the aforementioned plummeting popular stock markets, A-shares have not fallen but have risen recently. On April 17, the A-share market rose sharply, with growth styles leading the way, followed by cyclical sectors. The CSI 2000 rose by 6.6%, the CSI 500 by 2.85%, and the Shanghai Composite Index by 2.14%. On April 18, A-shares opened low and closed high, with the Shanghai Composite Index closing at 3,074.22 points, up 0.09%. Low valuations are the main reason why the market has been able to withstand external fluctuations recently.

Morgan Stanley Fund told reporters that, at present, macro liquidity is relatively loose, and micro liquidity changes are not significant, but the favorable condition is that the fundamentals are improving. In the short term, the first-quarter report may still have some pressure, and the overall policy strength is relatively weak, so the market is in a volatile pattern. However, as price indicators such as PPI stabilize, the improvement in performance is expected to increase starting in the second quarter, and institutional dividends and fundamentals are expected to form a resonance.