In Tokyo, Japan, pedestrians walk past a display showing the closing information of the Nikkei 225 index on August 5, 2024.

Last Friday, August 2, the U.Sstock markets faced an unprecedented collective plunge, with the Dow Jones Industrial Average dropping by over 2.4%, the S&P 500 experiencing a dip exceeding 2.6%, and the Nasdaq even declining by more than 3.4%. It was a disastrous day for the so-called "Magnificent Seven" tech stocks in the U.S.

As the Asian markets opened on Monday, August 5, the trend of decline continued, with Japanese stock indices starting with a loss of nearly 2%, followed by a significant drop throughout the trading session.

The Nikkei 225 index fell below 34,000, 33,000, and finally 32,000 points, reaching a decrease of over 13% at one pointUltimately, it closed down by 12.4%, landing at 31,506 points, effectively erasing all gains made this year

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This marked the largest point drop in the history of the Nikkei index, surpassing the infamous Black Monday of October 1987.

From its peak in July, the Nikkei 225 index has fallen over 26%, with Japan's Topix index dropping more than 24%, officially entering a technical bear marketNotably, the volatility index futures for the Nikkei 225 experienced trading halts twice during the day due to circuit breakers.

Meanwhile, the South Korean KOSPI index also witnessed a significant setback, falling by 8.77%, leading to a circuit breaker activation, with shares of Samsung plummeting by over 10%, marking the largest drop since 2008. Across the Asia-Pacific region, stock indices, excluding China, suffered widespread declines.

In Europe, the downtrend mirrored its Asian counterpartsThe DAX30 in Germany fell by 1.8%, the FTSE 100 in the United Kingdom dropped by 2.1%, the CAC40 in France decreased by 1.6%, and the Euro Stoxx 50 index declined by 1.5%.

On the East Coast of the U.S., the stock market faced its most significant setback in two years, with the S&P 500 slumping 3.00% to 5,186.33 points, the Dow dropping 2.60% to 38,703.27 points after a staggering loss of 1,033.99 points, marking the largest single-day drop since September 2022. The Nasdaq composite index fell 3.43%, closing at 16,200.08 points

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In this market sell-off frenzy, the total market capitalization of the "Seven Giants" of American technology evaporated by approximately $650 billion overnight, with a cumulative loss of $1.27 trillion over the past three trading days.

Market analysts on Wall Street anxiously scoured trading charts seeking critical support levels in hopes of predicting whether the worst of the sell-off was over.

The question arose: what triggered this massive worldwide stock market downturn?

It sparked concerns of a potential "asset sinkhole" looming on the horizon, signalling a possible end to the recent sell-off.

Several interrelated factors contributed to the epic market decline.

First was the "angina" of the dollar, reflecting intense pressure within the U.STreasury repurchase marketUnder normal conditions, the Secured Overnight Financing Rate (SOFR) should hover around 5.31%, only slightly below the federal funds rate

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However, issues arose when the SOFR rose above this threshold, leading to significant liquidity issues as major dealers struggled during clearingAs a result, many players were forced to pledge Treasury bonds for financing, causing abnormal increases in interest rates.

The abnormalities in the SOFR began on June 25 and escalated when it breached the ceiling of 5.4% on July 1. Earlier this month, it remained above 5.35%, indicating profound systemic stress that cascaded through the markets.

This predicament, described as an "asset sinkhole," surpassed traditional explanations linked to poor U.Seconomic data or geopolitical tensions aloneAn analysis presented on July 27 indicated that if the Federal Reserve did not halt the balance sheet reduction immediately and significantly lower interest rates, serious market repercussions would ensueThe current market behavior is likely a reflection of that anticipated impact.

The dynamics behind these dramatic shifts are complex: a strong yen environment caused by the Bank of Japan's hawkish policy changes has led to forced deleveraging among yen-based carry traders

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The bank's decision to raise interest rates had ripple effects on the global trading landscape, prompting significant asset sales as investors rushed to lock in profits amid increasing yen strength.

The recent waves of economic data from the U.Ssuggested a downturn ahead, which also prompted a fall in U.STreasury bond yields, leading to diminishing returns for global currency arbitrage playersThis, compounded by an unfavorable outlook for Japanese exporters, raised alarms regarding potential profit losses in critical sectors, such as automobiles.

Additionally, geopolitical tensions in the Middle East heightened investor fear, with businesses reassessing the impact of regional upheavalRisks associated with potential military engagements further fueled appetite for safe-haven assets like the yen, resulting in additional exacerbation of the carry trade liquefaction.

As the Japanese and Korean markets opened to trading on August 6, there was a significant rebound, with the Nikkei 225 soaring over 3,200 points, marking an increase of over 10%, and Korea’s KOSPI Index also enjoying a rise of over 4%. By the end of the trading day, the Nikkei 225 noted the largest surge in its history, up 10.23%. However, concerns linger over whether this bounce was merely a fleeting reaction or an indication of stability returning to the markets.

The question now remains: Is the worst of the global market crash behind us? Can we expect further declines in the U.S