The global financial landscape has witnessed a dramatic shift as asset prices plummet across the boardThis sudden downturn seems to be a consequence of uncertain interest rate forecasts and geopolitical tensions, leading to significant declines in the three major U.Sstock indices as of a recent trading dayThe Nasdaq composite dropped over 1%, marking a troubling trend, while the S&P 500 experienced its fourth consecutive loss, and the Dow Jones faced an alarming eight-day losing streak.

One major factor behind this downturn is the shift in tone from Federal Reserve Chairman Jerome PowellOn March 16, he provided clear signals regarding a postponement of interest rate cuts, which have resulted in heightened U.STreasury yields and a rising U.Sdollar indexThe stock market has struggled for three weeks in a row, with the dollar index managing to remain above 106 after a series of daily increases.

Market expectations have shifted dramatically

While many had previously anticipated the Fed to cut rates by June, recent developments have seen this probability tumble to below 20%. Earlier projections for multiple rate reductions this year have now been called into question, leading to severe declines in equity markets in both the U.Sand Japan and re-establishing the strength of the dollarThis dynamic has placed additional pressure on Asian currency markets, with the Japanese yen dropping to a 34-year low against the dollar, and the Chinese yuan recently falling below the critical threshold of 7.1 against the dollar for the first time in nearly three weeks.

Professional investors and traders from overseas institutions have voiced concerns that the reversal in rate cut expectations could lead to prolonged sell-offs in risk assets such as U.Sand Japanese equitiesAccording to Goldman Sachs, while they expect U.Sinflation to moderate, they also foresee a shallower cycle of rate cuts from the Fed, which could delay easing measures from emerging market central banks, particularly in Southeast Asia, as they might choose to wait for the Fed to act first.

Chinese authorities seem to be cautious in their approach

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Several international investment banks suggest that enhanced policy support from China is likely only if economic data shows further weakness, and there may be constraints on lowering the Medium-Term Lending Facility (MLF) rate.

The enthusiasm for "rate-cut trades" appears to have dwindledDuring a recent commentary, Powell noted that persistent inflation has begun to dilute the confidence of the Fed in making imminent cuts to interest rates, stating that high rates might stay for longer than anticipatedCurrent projections show that the likelihood of a rate cut in June stands at a mere 16.3%.

Recent economic indicators have certainly not bolstered the case for a rate cutThe U.Sjob market remains robust, with non-farm employment figures exhibiting growth for a stunning 39 consecutive months, marking the fifth-longest streak in historyIn March, there were 303,000 new jobs added, and the unemployment rate dipped to 3.8%.

Moreover, inflation figures have not continued on the expected decline trajectory

In March, the annual core Consumer Price Index (CPI) growth rate remained stable at 3.8%, contrary to predictions of a drop to 3.7%; additionally, the overall CPI rose significantly from 3.2% in February to 3.5% in March, exceeding market expectations of 3.4%.

Perhaps most significantly, consumer spending, which makes up nearly 70% of the U.SGDP, surged with March’s retail data coming in exceptionally strong, rising 0.7% from February, the highest level since September of the previous yearThis momentum saw the dollar climb rapidly, undercutting positions in the Yen and the Korean Won, pushing them to record lows.

This backdrop explains Powell's shift in perspectiveAnalysts have commented that the resilience of the U.Seconomy limits deflationary pressures, compelling the Fed to adopt a cautious stanceHistorical perspectives weigh heavily, particularly from the inflation crises of the 1970s when premature rate cuts led to catastrophic results, sending inflation skyrocketing back to double digits and necessitating unprecedented hikes in interest rates.

The fallout has not been confined to the U.S

markets alone; equities in various international markets have also sustained significant declinesInvestor anxiety over the intensifying geopolitical situation in the Middle East, coupled with the reverse of investor sentiment toward rate cuts, has contributed to a substantial pullback in stock prices, particularly in the U.Sand Japanese markets which had soared close to 40% since last year.

The S&P 500, which had been on an upward trajectory, now faces a grim reality of declining for three straight weeksOn March 15, it broke through crucial support levels and is now projected to potentially plunge towards the psychological mark of 5000. The index had surged earlier this year, previously breaking the 5200 barrier.

Fawad Razaqzada, a senior market analyst, stated, "The long-term support is seen between 4795 and 4817 pointsThis range marks the peaks of the last two yearsThe current key resistance is the prior support area of 5103 to 5143. We need to see a daily close above this range to resurrect bullish sentiment."

It is worth noting that concentration risks in U.S

equities have become increasingly apparentThe so-called "Seven Giants" — major tech stocks like Microsoft, Apple, Nvidia, Alphabet, Meta, and Tesla — had previously displayed synchronized movementsHowever, as 2024 unfolded, disparities among these stocks have widened, with the performers lagging, such as Apple and Tesla, seeing their values declineGiven their substantial market capitalizations, this imbalance could amplify pressure on the broader U.Smarket.

According to Schroders, the valuation of major global indices appears unattractive, especially in the U.SBy early 2024, the projected price-to-earnings ratio for the S&P 500 was around 21 times, showing a nearly 20% premium compared to its 15-year medianThe cyclical adjusted P/E ratio (at 31 times) is also significantly higher than the average since 1990, suggesting that future returns for U.Sstocks may declineOther markets present less resistance, as they operate at a slightly lower average cyclically adjusted P/E ratio of 15, which is closer to recent historical norms.

The Japanese stock market has also faced surprising retracting episodes, driven by stronger-than-expected U.S

retail sales figures and persisting tensions in the Middle EastInvestors flocked to safer assets, leading to rampant sell-offs in Japanese technology stocks, with the Nikkei index facing significant pressure, dipping over 2% at one pointBy April 18, the Nikkei 225 index concluded at 38,054.5 points, representing a 7.4% decline from its previous high of 41,087.75 points.

David Scutt, a senior strategist at StoneX, commented on the yen's continuous declines, suggesting the possibility of intervention by the Bank of Japan if the yen's weakening persistsA healthier yen could increase the already heightened pressure on the Nikkei 225, especially as weaknesses in U.Stech stocks begin to impact Japanese equitiesIf the downward trend continues, the first target may be 37,000 points, followed by 35,700 and 35,280.

In the Asia-Pacific currency markets, the revitalization of the dollar has wreaked havoc on currencies outside the U.S

This week, fears about the euro falling below parity against the dollar have resurfaced, and the Asian currency space has similarly encountered turbulence, with significant depreciations in currencies such as the yen, won, rupee, Indonesian rupiah, Thai baht, and Philippine peso.

Starting April 15, the depreciation trend intensifiedThe euro fell for five consecutive days, closing at 1.0624; the dollar/yen accelerated, closing above 154 yen, reaching the highest bear sentiment since the financial crisisThe won against the dollar fell to nearly 1,400—its lowest point in around 17 months—and the yuan's midpoint index fell into the 7.1 range against the dollar for the first time since March 22. The offshore yuan once dipped below the critical threshold of 7.28.

The concerns regarding the depreciation of the yen and won have not gone unnoticed by Japan and South Korea, who have expressed apprehensions regarding the situation

Consequently, the central banks in China, Japan, South Korea, the Philippines, and Indonesia have intervened collectively to manage foreign exchange expectations.

On April 18, the governor of the Philippine central bank remarked that the decline in the peso was not significant enough to influence their policies, emphasizing that the problem lies not with a weak peso, but rather with a robust dollarHe indicated that a fourth-quarter rate cut is still on the table, but if the situation worsens, it could be pushed back to the first quarter of 2025. Meanwhile, Japanese government spokesperson Hiroshi Hayashi has stated that they are closely monitoring currency fluctuations and are prepared to take action as needed.

In contrast, the performance of both the yuan and Chinese stock markets has remained relatively stableEven with the recent slip of the dollar against the yuan, the Chinese central bank has shown its intention to stabilize RMB exchange rates by employing various mechanisms to mitigate currency fluctuations, ensuring that the dollar/RMB exchange rate remains below key threshold levels of 7.24.

Interestingly, while many popular equity markets have suffered, Chinese stocks have defied the downward trend and posted gains

On April 17, the A-share market surged, led by growth-oriented investments, and the broad-based indicators reflected an uptrend: the CSI 2000 saw an increase of 6.6%, while the CSI 500 climbed by 2.85%, and the Shanghai Composite Index rose by 2.14%. Following up on April 18, the market opened lower but closed higher, with the Shanghai Composite Index settling at 3,074.22 points, marking a 0.09% increaseAnalysts attribute this resilience to the A-share market's low valuations, which have helped it withstand external volatility.

Fundamentally, Morgan Stanley's outlook suggests that despite macro liquidity being relatively loose and micro liquidity remaining steady, structural improvements in the economy could enhance conditionsIn the immediate term, while quarterly reports may still present some pressure and total policy incentives are lower, the market is expected to stabilizeWith price indicators like PPI becoming more stable, an improvement in performance could materialize starting the second quarter, leading to a synergy between institutional benefits and fundamental market conditions.