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11 de septiembre de 2024

THE AUGUST 5TH GLOBAL MARKET CRASH: A WAKE-UP CALL FOR AN ACTIVE INTERNATIONAL COORDINATION

Por: Lina Marcela Mosquera Palacios*

On August 5th, 2024, global stock markets faced a dramatic sell-off, with significant declines across major indices. The turmoil originated in Asia, particularly Japan, where the Nikkei 225 (a financial indicator for Japan’s stock market, representing the performance of 225 of the largest and most prominent companies listed on the Tokyo Stock Exchange) experienced a historic 12.4% drop marking its most significant single-day decline since the 1987 market crash.[1]

a)    Reasons for the crash

A key driver behind this was the Bank of Japan’s recent rate hike on July 29, 2024, from 0% to 0.25%,[2] disrupting the longstanding practice of the carry trade (this financial practice relies on borrowing yen at low-interest rates and investing in higher-return markets, typically in the U.S). With the benchmark rate increasing by 0.25%, the yen’s value plunged from 160 to 143 per U.S. dollar—an extreme shift in typically stable currency markets.[3]

Simultaneously, the U.S. employment report, released on August 2, 2024, revealed an unexpected rise in unemployment to 4.3%,[4] a situation which heightened fears of a looming recession since the report triggered the Sahm Rule (according to this rule, the economy is considered to be in the early stages of a recession when the three-month moving average of the jobless rate exceeds the 12-month low by at least half a percentage point), which has historically been a reliable predictor of recessions.

b)    Consequences

The Crash exacerbated the sell-off in both European and American exchanges. The technology sector endured the sell-off. For instance, Nvidia dropped 6.4%, while Apple plunged 4.8% when Warren Buffett’s Berkshire Hathaway slashed its holdings in the tech giant by half; other notable declines included Tesla, which fell 4.2%, and Super Micro Computer, down 2.5%.[5]

In the middle of the chaos, investors fled from risky assets to safer investments, [6] particularly bonds, driving bond yields sharply downward. As evidenced by the fall of nearly 30 basis points of the 10-year U.S. Treasury yields.[7]

c)     The “Restabilization”

Despite the dark mood on Monday, the market showed signs of steadying, and by Tuesday, August 6th, 2024, the S&P 500 and Nasdaq indices recovered some of their losses, and Japan’s Nikkei 225 soared nearly 11%. [8]

Although the August 5th Crash was severe, it did not reach the levels of historical market crashes like those seen during the 2008 financial crisis or the COVID-19 market crash in March 2020. Still, the crash was significant enough to trigger questions about whether this was the prelude to a more prolonged downturn, thus creating an environment of speculation in the stock market.[9]

d)    The Crash has exposed the urgent need for a coordinated response

Nowadays, the regulatory approaches of states that react to a crash can differ significantly globally. For example, the United States focuses on monetary easing and regulatory reforms (referencing the policies enacted during 2008 and the Covid-19 crisis). Japan employs aggressive monetary easing and fiscal stimulus,[10] and China relies on swift government intervention and targeted support, moving away from an aggressive macroeconomic policy to a more prudent stance.[11] Further, those approaches are from an individualistic perspective without considering how such measures may affect global trade.[12]

States are used to dealing with financial crises by themselves in the first instance. However, one State’s policies can create ripples that, in the blink of an eye, swell into tidal waves affecting the shores of another. Thus, adopting a selfish or uncooperative stance only amplifies the vulnerabilities of the global economy, as it undermines the ability to address shared challenges—such as financial speculation—through coordinated responses. This lack of coordination could potentially lead to future crises.

In Juxtaposition, international cooperation and the implementation of coordinated policies are crucial in the face of global economic crises. Organisations such as the G20, the International Organization of Securities Commissions (IOSCO), the Financial Stability Board (FSB), and the International Monetary Fund (IMF) play pivotal roles in these efforts. For example, the IMF and FSB regulatory recommendations on macroeconomic and financial stability risks, particularly in emerging sectors like crypto assets.[13]

However, the slow pace of their reactions could improve the effectiveness of those endeavours, making it challenging to shift from individualistic national approaches to more unified global strategies.[14]

e)     Conclusion

The August 5th global market crash serves as a sobering reminder of the interconnectedness of today’s financial markets and the risks of uncoordinated national responses. While individual state actions may temporarily stabilise local economies, they often exacerbate global vulnerabilities, as evidenced by the global ripple effects that triggered market turmoil. The crash highlighted the urgent need for a more proactive, internationally coordinated approach to managing economic shocks rather than reactive measures driven by national interests alone. In this increasingly interdependent financial landscape, institutions such as the IMF, FSB, and G20 must act with greater agility and cooperation, ensuring their regulatory frameworks evolve with emerging market dynamics. Only through sustained collaboration can the global community mitigate the risks of future financial crises and foster a more resilient global economy.

Bibliography

  1. Adrian, T. and Surti, J. (2022) Capital Markets Regulation is more robust, but some gaps still must be closed, IMF. Available at: https://www.imf.org/en/Blogs/Articles/2022/06/29/capital-markets-regulation-is-stronger-but-some-gaps-still-must-be-closed (Accessed: 14 August 2024).
  2. Bray, W. (2024) Unpacking the 20 most impactful financial regulations from the last 20 years, The TRADE. Available at: https://www.thetradenews.com/unpacking-the-20-most-impact-financial-regulations-from-the-last-20-years/ (Accessed: 14 August 2024).
  3. Bredemeier, K. and Gallo, W. (2024) World stocks plunge on fears of US economic slowdown, Voice of America. Available at: https://www.voanews.com/a/wall-street-headed-sharply-lower-again-after-japan-s-nikkei-index-tumbles-to-worst-loss-since-1987/7730241.html (Accessed: 14 August 2024).
  4. Carew, S. and Cooper, A. (2024) Global stocks rebound from sell-off, treasury yields, dollar higher, Reuters. Available at: https://www.reuters.com/markets/global-markets-wrapup-1pix-2024-08-06/ (Accessed: 14 August 2024).
  5. Choe, S. (2024) Japan’s share benchmark soars nearly 11% daily after massive selloffs that shook Wall Street, AP News. Available at: https://apnews.com/article/stocks-markets-nikkei-economy-c6240977e9482bf7207abc53b2a11e58 (Accessed: 14 August 2024).

[1] Japan’s nikkei sees biggest tumble since 1987 crash (2024). Deutsche Welle. Available at: https://www.dw.com/en/japans-nikkei-sees-biggest-tumble-since-1987-crash/a-69857520 (Accessed: 14 August 2024).

[2] He, L., Liu, J. and Cooban, A. (2024) Japanese stocks rebound from worst crash since 1987 while global markets are mixed, CNN. Available at: https://www.cnn.com/2024/08/05/investing/japan-nikkei-225-stock-market-rebound-intl-hnk/index.html (Accessed: 14 August 2024).

[3] Obe, M. (2024) Bank of Japan raises interest rate to 0.25%, open to further hike this year, Nikkei Asia. Available at: https://asia.nikkei.com/Economy/Bank-of-Japan/Bank-of-Japan-raises-interest-rate-to-0.25-open-to-further-hike-this-year (Accessed: 30 August 2024).

[4] Bredemeier, K. and Gallo, W. (2024) World stocks plunge on fears of US economic slowdown, Voice of America. Available at: https://www.voanews.com/a/wall-street-headed-sharply-lower-again-after-japan-s-nikkei-index-tumbles-to-worst-loss-since-1987/7730241.html (Accessed: 14 August 2024).

[5] Teng, T. (2024) Global stocks plunge after tech-driven sell-off and US growth fears, euronews. Available at: https://www.euronews.com/business/2024/08/02/global-stocks-plunge-after-tech-driven-sell-off-and-us-growth-fears (Accessed: 31 August 2024).

[6] Carew, S. and Cooper, A. (2024) Global stocks rebound from sell-off; treasury yields, dollar higher, Reuters. Available at: https://www.reuters.com/markets/global-markets-wrapup-1pix-2024-08-06/ (Accessed: 14 August 2024).; Lee, Y.S. and Reid, J. (2024) A global stock sell-off deepens with investors fleeing to safe havens, CNBC. Available at: https://www.cnbc.com/2024/08/05/a-global-stock-rout-is-deepening-with-investors-fleeing-to-safe-havens.html (Accessed: 31 August 2024).

[7] How changing interest rates affect bonds: U.S. Bank (2024). Available at: https://www.usbank.com/investing/financial-perspectives/market-news/interest-rates-affect-bonds.html (Accessed: 31 August 2024).

[8] Choe, S. (2024) Japan’s share benchmark soars nearly 11% a day after massive sell-offs that shook wall street, AP News. Available at: https://apnews.com/article/stocks-markets-nikkei-economy-c6240977e9482bf7207abc53b2a11e58 (Accessed: 31 August 2024).

[9] US stocks buoyant as investor sentiment eases after global sell-off (2024) euronews. Available at: https://www.euronews.com/business/2024/08/07/us-stocks-buoyant-as-investors-return-after-global-sell-off (Accessed: 14 August 2024).; Kirsch, J. (2024) Does the recent stock market dive indicate a recession in 2024? Forbes. Available at: https://www.forbes.com/sites/investor-hub/article/does-recent-stock-market-crash-indicate-recession-2024/ (Accessed: 14 August 2024).

[10] McBride, J. and Xu, B. (2018) Abenomics and the Japanese economy, Council on Foreign Relations. Available at: https://www.cfr.org/backgrounder/abenomics-and-japanese-economy (Accessed: 31 August 2024).

[11] Jun, Z. (2023) Why hasn’t China rushed to bail out its economy?, Project Syndicate. Available at: https://www.project-syndicate.org/commentary/china-embraces-prudent-economic-policy-approach-by-zhang-jun-2023-08 (Accessed: 31 August 2024).

[12] Adrian, T. and Surti, J. (2022) Capital Markets Regulation is stronger, but some gaps still must be closed, IMF. Available at: https://www.imf.org/en/Blogs/Articles/2022/06/29/capital-markets-regulation-is-stronger-but-some-gaps-still-must-be-closed (Accessed: 14 August 2024).

[13] IMF-FSB Synthesis Paper: Policies for Crypto-Assets (2023). Financial Stability Board.

[14] Joint Letter of the FSF Chairman and the IMF Managing Director to G20 Ministers and Governors (2008). Financial Stability Board.  Available at: https://www.fsb.org/2008/11/r_081113/ (Accessed: 31 August 2024).

* Monitora del Departamento de Derecho Comercial y estudiante de quinto año de derecho.