To The Moon

On Thursday, the major indexes of US stocks plunged, the $NASDAQ(.IXIC)$ dropped the most since 2020. U.S. stocks lost $100 billion overnight, with $Cboe Volatility Index(VIX)$ rose by 22%, and $2x Long VIX Futures ETF(UVIX)$ rose 37%.

Last time we saw such a huge decline was when the COVID-19 hit the USA in 2020. The figure below shows the 5 largest declines of $NASDAQ(.IXIC)$ in the past 2 years.

The explanations of the reasons for the sharp decline of US stocks includes the Non-farm payroll jobs data lower than expected, worried about the economic stagflation, the drag of interest rate hike, the yield of US bonds breaking through 3.1%, the sharp rise of the US dollar, bad earnings performance, derivatives mischief, large fund explosion, etc.

Tiger Broker market commentator, Dr. Lan pointed out: that none of the above is the most direct reason, but can't get rid of the relationship?

Believe it or not, let's take a look at the following specific analysis.

1. Because of The Fed's Interest Rate Hike?

Whenever the market falls, blaming the Fed has become the easiest and most instinctive response.

But this time we really can't blame the Fed, because the market rose sharply after the Fed raised interest rates by 50bps the day before, and the consistent interpretation of the market also expressed that the Fed ruled out the possibility of raising interest rates by 75bps, which was deeply liked by the market.

Investors are currently positioned for six to eight rate hikes in 2022 and 2023

So there's really no way to blame the Fed for Thursday's sharp market decline. Otherwise, how can we face the reasons for Wednesday's rise?

Welcome to learn from history today to see how the index performs after raising interest rates.  Bull Market is Always Born in Pessimism! Key to Survive After Rate Hike!

2. Concerns About Economic Expectations and Monetary Policy Under Inflation?

From a macro perspective, raising interest rates is a necessary policy under high inflation. Powell also said at the FOMC meeting in May that inflation is "much too high".

According to the latest data released by the U.S. Department of labor on May 5, the initial value of U.S. Nonfarm-Payroll jobs decreased at an annual rate of 7.5% in the Q1, the largest decline since the Q3 of 1947.

In the same period, the initial value of non-agricultural unit labor costs soared at an annual rate of 11.6%, the largest increase in 40 years. These figures once again highlight the high inflation.

Dr. LAN believes that considering the high correlation between the trend of unit labor cost and core inflation, the core inflation mainly depends on the improvement of labor shortage. In order to prevent the current short-term inflation from evolving into a loss of confidence in long-term inflation, it requires the Federal Reserve to make a more sustained determination at the level of anti inflation.

Therefore, in this process, the phantom of inflation and the risk of fed Hawks have not been lifted, which means that the U.S. stock and bond market will indeed be in a stage of sustained high volatility.

3. Due to the 10-year Yield of US bonds Soared Beyond 3%?

On Thursday, the 10-year yield of US bonds soared, once reaching 3.1%, reaching 3% for the first time since November 2018.

At present, the size of the US Treasury bond market has reached $23 trillion. The rise in US bond yields has not only increased the borrowing costs of enterprises but also pushed up mortgage interest rates. With the depreciation of exchange rates in Japan, China, Russia, and other countries, the selling pressure on US bonds has increased.

In addition, the bond financing of U.S. listed companies will be isolated from the stock repurchase chain, which is obviously unfavorable to US stocks. To some extent, it seems to be a situation of killing both stocks and debts.

However, on Thursday, the 10-year interest rate (red line) did not rise at the opening of 9:30, but fell first and then rose, and fell a lot at the closing. But the stock market ($S&P 500(.SPX)$ , blue line) fell as soon as it opened.

Seems The intraday correlation between the two is not strong.

You may ask will the sharp rise in US bond yields negatively affect US stocks?  

The answer is yes! The soaring yield of US bonds will inevitably hit growth investment. In the past, the bull market was led by growth stocks. 

The current economic environment determines that it is difficult for growth stocks to become a climate, so the negative factors of US stocks are gradually increasing.

With Fed’s tightening monetary policy , the stability of US stocks will naturally deteriorate. Some analysts pointed out that: the 40-year bull market of US bonds has ended, and we have never reduced the inflation rate by more than 2.5% without triggering a recession. The Fed has not prepared for a soft landing, and the recession is inevitable.

4. US dollar Index Hit a 20-year High Which Caused Capital Outflow?

After the interest rate hike decision, the US dollar index rose sharply and returned to above 103 on Thursday, approaching the 104 important mark, setting a new high since December 2002.

Generally speaking, the rise of the US dollar will suppress US stocks, because the investment in the US stock market does not come entirely from US dollar assets. Therefore, the rise of the US dollar may easily lead to liquidity tension and then affect the stagnation of the rise of US stocks.

However, since 2019, the rise of US stocks is more from valuation expansion than profit-making, that is to say, the rise is almost entirely supported by the easing policy of the Fed.

According to the data, the capital momentum of the US stock market has not retreated on a large scale. The Quick FactSet marked the total market value of global stocks is $106 trillion. Among them, the US stock market increased by 71% to about $45 trillion. Now US stock Market capital is around $46 trillion.

In addition, the rise of the US dollar since March. The market also has priced in the rate hike increase, the same rise for the US dollar is inevitable, which has depreciation pressure on other currencies and causes a great impact on the imports of other countries.

In addition, the continuous rise of the US dollar may not be sustainable, because the value of the US dollar mainly comes from the money supply and the economic strength of the United States:

• As a strong international currency, the US dollar, on the one hand, benefits from its hegemonic position. On the other hand, it is also the product of the Fed's tight monetary control under high inflation.
• With the narrowing of the international circulation region of the US dollar, the long-term increase may mean that the US dollar will continue to break its promise in the future.

Strictly speaking, due to the lack of better hedging channels for international capital, the market has to choose the US dollar for hedging temporarily. However, in the medium and long term, this round of higher than expected appreciation is a good opportunity to sell the US dollar periodically.

We've seen many investment institutions buy up large-scale US dollars to hype the Fed to raise 75 bps. With the dust of the Fed raising 50 bps settled, they took profits on Thursday, we can see that drop after the US dollar Index rise above 102. 

5. A Sharp Rise in Risk Aversion? 

The recent sharp rise in US bond yields and the US dollar index may reflect the tension of global financial conditions and liquidity. But the market's risk aversion seems less serious.

The spot price of gold was $1903 at 9:30 and $1877 at 4 p.m., down 1.4% during Thursday.

The US dollar index fluctuates around $103 during the trading time of the day, so there is no so-called market hedging behavior - the so-called hedging is to exchange assets for gold or US dollars or US bonds, but the prices of the three assets have not risen sharply (US bonds even fell sharply)

In addition, although the panic index $Cboe Volatility Index(VIX)$ rose sharply , it obviously did not catch the 5% decline of $NASDAQ(.IXIC)$ .

For comparison , on April 22th 2022, $Cboe Volatility Index(VIX)$ rose 24% while $NASDAQ(.IXIC)$ fell 2.5%. Thursday VIX rose 22% andNASDAQ fell 5.0%.

If Thursday is a panic selling, VIX should rise more than 30%.

6. Poor Earnings of the Companies Leads to the Market Selloff?

Although this week still many companies are releasing quarterly report , the most important companies has finished report.

Moreover, from the list of popular stocks, although the share price fell sharply, only a few stocks had a large trading volume ($AMD(AMD)$ , $Airbnb, Inc.(ABNB)$ , $DoorDash, Inc.(DASH)$ ), most of which were enlarged, but the range was very normal (the trading volumn of $Tesla Motors(TSLA)$ increased by 20% compared with Wendesday, and the trading volumn of $Apple(AAPL)$ increased by 20% compared with Wendesday).

Therefore, you hardly can  see that the decline of the whole sector is pulled down by one or several key stocks.

7. Will it be a Big Fund that Broke its Position?

It might be possible, but the premise is that the fund's position covers almost the whole US stock market, which should be at the level of $100 billion.

The performance of American funds is generally poor this year, and Tiger Global has fallen 44% year to date. But even if Tiger Global broke its position (currently less than $20 billion), it is unlikely to cause such a tsunami.

There are only a few hundred billion dollar level hedge funds, so there will not be such a big impact. Since these reasons are not the reasons for the direct decline, what will be the reason?

8. Does Derivatives That Were Causing the Trouble?

There has one characteristic of Thursday's that all stocks, especially those trillion dollar companies, began to fall from the beginning of trading, with a very uniform rhythm.

The following figure shows the stock price chart of five trillion companies today, with almost the same trend.

It can drag the whole market with no difference. Some investors thought that derivatives were doing mischief: for example, the hugh volumn of opening short index options or the closing of index long options.

Who knows? As for the trading of index derivatives, the results will not be known until Friday.

There might be other reasons can be blamed for this decline, of course, but no one can say exactly what it is.

Any analysis that categorically relates to a cause must be irresponsible.

Recommended Reading:

Bull Market is Always Born in Pessimism! Key to Survive After Rate Hike!

So the final question is,

Which Factors Mentioned Above Do You Think Has the Greatest Impact?