This Monday, a day full of tension and uncertainty, triggered panic among global investors. The "Black Monday" of 1987 reappeared, and public opinion fell into deep concern about economic recession. What happened recently? What caused the reappearance of "Black Monday"? Where is the way out for global stock markets in the future? Is the global financial crisis really coming?

What happened on "Black Monday"?

On Monday, October 19, 1987, a global stock market crash broke out. The Dow Jones Industrial Average plummeted 508 points (22.61%), leading the panic in the financial market. Specifically, the Hong Kong stock market fell 45.8% in October, the Sydney stock market fell 41.8% in October, the London stock market fell 26.4% in October, and the New York stock market fell 22.6% in October. The major stock markets around the world fell sharply, and the economic recession in the late 1980s followed.

37 years later, the global stock market encountered "Black Monday" again. The Japanese and Korean stock markets led the global decline. On August 5, the Nikkei 225 stock index closed down 12.4%, down 26.56% from its high on July 11, and triggered two circuit breakers (automatic trading suspension mechanism) during the session, falling back to the end of 2023. The Nikkei 225 fell 11,270.65 points in a single day, surpassing the "Black Monday" in October 1987, setting a record for the largest drop in history. The South Korean Composite Index fell 8.77%, with the largest intraday drop of about 10%, approaching the circuit breaker mechanism, setting the largest drop since 2008.

U.S. stocks fell sharply, with the Dow and S&P recording the largest single-day declines since September 2022. As of the overnight close, the Dow Jones fell 2.60% to 38,703.27 points; the S&P 500 fell 3.00% to 5,186.33 points; and the Nasdaq Composite fell 3.43% to 16,200.08 points. The "Big Seven" stocks of the US stock market collectively plunged, with Apple closing down 4.82%, falling more than 10% during the session; Microsoft fell 3.27%; Nvidia fell 6.36%, falling more than 15% at one point; Google fell 4.61%, Amazon fell 4.10%, Meta fell 2.54%; Tesla fell 4.23%.

In addition to the decline in risky assets represented by the stock market, Bitcoin fell 11.26%, falling below $50,000 per coin. Gold and silver, which have safe-haven properties, rose 0.21% and 0.73% respectively, and the US Treasury yield fell. The 10-year US Treasury yield fell to 3.77%, the lowest level since July 2023. The VIX index (S&P 500 Volatility Index), which represents the degree of market panic, soared to its highest level since October 2023.

Source: uSMART SG

What is the reason for the reappearance of "Black Monday"?

US employment data is lower than market expectations, triggering concerns about economic recession. Last Friday, the U.S. Department of Labor released a job report showing that U.S. job growth slowed more than expected in July, and the unemployment rate rose to the highest level in nearly three years, reaching 4.3% (market estimate 4.1%). Immediately, the "Sam's Rule" was triggered, causing the market to fall into a panic of "U.S. recession". "Sam's Rule" refers to the three-month moving average of the unemployment rate (4.13%) minus the lowest point of the unemployment rate in the past 12 months (3.6%). When the value exceeds 0.5% (0.53% in July), it means that the economy is experiencing a recession.

The Bank of Japan raised interest rates, triggering a decline in the Japanese stock market and raising the cost of global capital arbitrage. On July 31, the Bank of Japan held a monetary policy meeting. In order to combat inflation under the continued depreciation of the yen, the Bank of Japan decided to raise interest rates and reduce the scale of government bond purchases. It announced that the unsecured overnight interest rate would rise from 0-0.1% to 0.25%, which was the first interest rate hike since Japan ended negative interest rates in March. For Japan, due to the interest rate hike, the yen appreciated and financial conditions tightened, triggering a decline in stock market valuations. For the world, since the yen has long been a global arbitrage currency (exchanging low-interest yen for higher-interest currencies such as the US dollar, investing in US dollar assets, and earning the interest rate spread in the middle), the Bank of Japan raised interest rates, raising global arbitrage costs and reversing carry trades. At this time, it is necessary to sell US dollar assets and repay yen, which is easy to cause a liquidity crisis under the background of yen appreciation.

Geopolitical tensions have suddenly intensified, causing investors to worry about the stability of global economic development. Against the backdrop of the protracted Russian-Ukrainian conflict, unrest in the Middle East has suddenly intensified. These geopolitical events have led to a continuous rise in energy prices, increased global inflationary pressures, weakened corporate and consumer confidence, and had a negative impact on global economic growth. Affected by geopolitical strategic games, the stability of the global supply chain is worrying. Not only has it not fully recovered, but there is even a risk of being blocked again. This has affected the production and trade of the global manufacturing industry, increased production costs and supply chain uncertainties, and not only posed a threat to the manufacturing industry, but also formed a potential obstacle to global economic recovery and growth.

Is the United States heading towards a recession? Will funds flow to China?

Chicago Fed President Goolsbee and San Francisco Fed President Mary Daly came out to try to ease people's concerns about the US recession. They said: "The July non-farm payrolls report is only a piece of data. Although this employment data is weaker than expected, the economy has not yet fallen into recession. The rise in unemployment is not due to large-scale permanent layoffs, but because of an oversupply of labor, especially immigrants."

It is worth noting that despite the sluggish US employment data and rising unemployment, the fundamentals of the US economy still have a certain degree of resilience. In the second quarter, GDP grew by 2.8% year-on-year, higher than expected, with strong contributions from consumption and investment demand. Residents' income and expenditure and consumption remained stable. In June, the year-on-year growth rate of US personal disposable income and consumer spending was basically the same as in May. Personal consumption increased by 2.3% month-on-month, contributing 1.6 percentage points to GDP, core commodity consumption increased by 2.4% month-on-month, and core service consumption increased by 2.2%.

At the same time, US interest rates are still high, and we need to be careful of extreme situations that may trigger a liquidity crisis. In the past, each round of interest rate hikes by the Federal Reserve triggered a global liquidity crisis, such as the Latin American debt crisis in the 1980s, the Asian financial crisis in 1998, the bursting of domestic asset bubbles in 2001 and 2007, and the Turkish currency crisis in 2018. This round of interest rate hikes by the Federal Reserve has lasted for 29 months since March 2022. The target range of the federal funds rate is as high as 5.25%-5.50%. The global dollar is flowing back, emerging economies are under pressure, and the appreciation of the yen is very likely to trigger a "liquidity crisis-asset selling-asset price decline" trading stampede. Of course, expectations of a Fed rate cut are rising, and the time is approaching. The Fed's interest rate meeting in July released a signal of a rate cut, and the market generally expects a rate cut to start in September, with the extent of the cut depending on U.S. inflation and employment. The Fed cuts interest rates, the dollar depreciates, and as global financial conditions ease, global capital flows from the United States to value depressions, which is expected to bring about an increase in the RMB exchange rate, and the Chinese stock market may usher in valuable development opportunities.

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