Asian stock markets plunge on concerns over U.S. recession

[Photo by Lee Seung-hwan]

Concerns about a U.S. economic recession and big tech companies’ deteriorating performance caused Asian stock markets to plummet on Monday. The sharp rise in the Japanese yen‘s value also led to the liquidation of the massive yen carry trade funds accumulated so far, causing shockwaves in the global financial markets.

“The recent market volatility was caused not only by concerns about an economic recession due to weak U.S. economic indicators but also by the realization of yen carry trade liquidation,” Hi Investment & Securities Co. analyst Park Sang-hyun said.

An analysis of data from the Bank of Japan by Maeil Business Newspaper revealed that foreign bank branches in Japan remitted 137.54 trillion yen ($954.01 billion) to their headquarters in 2023, the largest amount in 15 years since the 2008 global financial crisis.

South Korea’s benchmark Kospi index plunged by 234.64 points, or 8.77 percent, on Monday to close at 2,441.55, its largest drop in history.

The secondary Kosdaq index also fell by 11.3 percent, dropping below the 700 level (691.28). The two markets’ combined market capitalization evaporated by 235 trillion won ($171.74 billion) in a single day.

As both the Kospi and Kosdaq fell by more than 8 percent during the day, the “circuit breaker,” a mechanism to temporarily halt trading, was activated for the first time in 4 years and 5 months since March 19th, 2020.

Japan’s Nikkei 225 index, meanwhile, recorded its largest-ever single-day drop at 4,451.28 points (-12.4 percent). The Osaka Securities Exchange’s Topix futures market saw a circuit breaker activated for the first time since March 2011’s Great East Japan Earthquake.

Taiwan’s Taiex index, which is closely linked to the U.S. semiconductor index, plunged by 8.35 percent, breaking below the 20,000 level (19,830) and its largest-ever single-day drop.

Semiconductor stocks have been heavily positioned at the top of market capitalization in Korea, Japan, and Taiwan since the beginning of 2024 due to the investment boom in artificial intelligence (AI) and technology stocks. But a trend of reversing these investments all at once emerged as the AI rally cools and preference for safe assets resurfaces.

The U.S. stock market also declined at the opening on the same day. The Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite Index opened the day 1.71 percent, 3.65 percent, and 6.34 percent lower than the previous day‘s closing prices respectively.

In particular, big tech stocks fell sharply, with Nvidia Corp. dropping 14.18 percent, Apple Inc. 9.45 percent, Microsoft Corp. 4.81 percent, and Tesla Inc. 8.19 percent compared to the previous session.

The U.S. Services Purchasing Managers’ Index (PMI) for July 2024, however, came in at 51.4, slightly above Bloomberg‘s forecast of 51. U.S. stock futures markets also saw a 5 percent drop in Nasdaq futures, which led to a rush to sell, halting day-traded stock trading.

The bond market, on the other hand, turned in a robust performance due to expectations of a rate cut. The 3-year Treasury bond ended the day at 2.806 percent per annum, down 0.133 percentage points from the previous trading day, the lowest level in 2 years and 4 months. The 10-year Treasury bond also closed down 0.098 percentage points to 2.878 percent per annum.

In a separate development, equity-linked bonds (ELBs) with guaranteed principal are gaining popularity in Korea in the wake of the Hong Kong H Index-related equity-linked securities (ELS) debacle, with local securities companies introducing a variety of specialized products to attract customers. As individual investors turn to ELBs.

According to the Korea Securities Depository on Monday, the ELB issuance amount in Korean won in July 2024 was 2.58 trillion won. During the same period, ELS issuance amounted to 1.27 trillion won, only half the size of ELB issuance.

When the Hong Kong H Index crisis first began in January 2024, ELS issuance was higher than ELB, but the issuance volume reversed, and the concentration intensified, from February onwards.

Both ELS and ELB are derivative products that use specific stock indices or individual stock prices as underlying assets and provide promised returns when certain conditions are met. However, unlike ELS, ELB is a principal-guaranteed product. This is because about 90 percent of the funds are invested in safe assets like bonds, and the rest in derivatives such as stock indices or stocks. The structure allows the principal to be protected through safe assets while earning additional returns through derivatives.

As interest in principal-guaranteed products grows among individual investors, each securities firm is launching differentiated ELB products to capture investment sentiment.

The most active player is Kiwoom Securities Co., known as a retail powerhouse. It launched a special ELB product linked to the intermediary-type Individual Savings Account (ISA), a representative tax-saving product, in May 2024 that targets investors seeking tax benefits and stable returns. The company also plans to introduce an ELB targeting young professionals soon.

Kyobo Securities Co. has introduced a monthly paying ELB that provides monthly income as the importance of stable monthly investment income has grown and products like monthly dividend ETFs have gained popularity.