As we enter the second month of the new year, global financial markets are experiencing a “chilly spring.” The Chicago Board Options Exchange Volatility Index has grabbed the spotlight with a surge exceeding 100%. From Monday’s U.S. stock market to Tuesday’s Asian and European markets, all major stock indices have plunged. Even the cryptocurrency market hasn’t been spared—Bitcoin’s price has roughly halved compared to the end of last year.

Faced with such market conditions, several industry insiders told the reporter from the Shanghai Securities Journal that the adjustment is primarily driven by technical factors and is unlikely to mark the beginning of a “bear market.” On the contrary, this adjustment reflects the same prominent macroeconomic trend—the genuine and widespread recovery. Meanwhile, gold and the Japanese yen have gained favor among institutional investors amid the turmoil, emerging as safe-haven assets.

Technical adjustments or the primary cause of the stock market decline

The storm began in the U.S. stock market. Following last Friday’s sharp decline, all three major U.S. stock indexes fell again on Monday, with declines ranging from 3.8% to 4.6%. The Chicago Board Options Exchange Volatility Index, which measures investor panic, surged by 115.6%.

On Tuesday, in Asia-Pacific markets, major stock indices followed U.S. stocks lower, with the Nikkei 225 index falling by more than 4%. As of 6:53 p.m. Beijing time on the 6th, stock markets in the UK, Germany, and France all saw declines approaching 2%. During the same period, the price of COMEX near-month gold futures stood at $1,346.1 per ounce, up 0.72%. According to data from the cryptocurrency price platform CoinMarketCap, the price of Bitcoin was $6,588.15, down more than 16%. At the end of last year, Bitcoin’s price had still been above $15,000.

Wang Xinjie, Director of Investment Strategy at the Wealth Management Division of Standard Chartered Bank (China), told a reporter from the Shanghai Securities Journal that there are two main reasons behind the market’s significant volatility. The first is the inevitable reaction following excessively crowded trading. Over the past year, global risk asset volatility has nearly reached historic lows, which has translated into concentrated holding patterns in trading activities. As such concentration reaches a certain threshold, increased volatility becomes inevitable. The second reason is the rapid rise in the yield on 10-year U.S. Treasury bonds; the swift increase in the risk-free interest rate has had a substantial impact on the prices of risk assets.

Institutions such as Fidelity International and UBS Wealth Management both believe that technical factors may be the primary drivers behind the buildup of selling pressure and the accelerated decline in late trading hours.

However, economists point out that these market fluctuations collectively confirm the emergence of a shift in global macroeconomic trends—a significant turning point. Cheng Shi, Chief Economist at ICBC International, told a reporter from the Shanghai Securities Journal that despite the severe market volatility, in the long run, this development is actually beneficial for the real economy. Only when risks are fully cleared and markets calm down can we encourage resource allocation to shift from finance back to the real economy. Behind a series of market developments—such as Bitcoin’s sudden plunge, U.S. stocks and Treasury bonds experiencing a “Black Friday,” the sharp depreciation of the U.S. dollar, and rising market volatility—lies a single, prominent macroeconomic trend: the genuine and widespread recovery.

Wang Xinjie believes that the fundamental logic behind the global economic recovery remains unchanged: the economic cycle continues to move toward its later stages, and the increase in capital expenditures is irreversible. Around eight to ten years after the financial crisis, as demand begins to pick up, equipment will need to be iteratively upgraded. From a transmission mechanism perspective, this market volatility does not have a direct link to the real economy and, in essence, differs somewhat from the subprime mortgage crisis of those days.

Gold and the Japanese yen have become preferred safe-haven assets for institutions.

For the reasons mentioned above, industry insiders do not believe that the market outlook will turn pessimistic as a result. Li Lin, head of asset allocation strategy research at Yixin Wealth, analyzed for reporters that, with regard to the S&P 500 index, its valuation was already high to begin with, yet since the start of the year, the index has continued to climb at an even faster pace, thereby increasing the risk of a pullback. However, as of now, the company does not consider this to be the beginning of a stock market “bear market.” Although 2018 will be a year fraught with significant risks for U.S. stocks, the prospect of relatively robust U.S. economic growth and stable earnings should help cushion any downward pressure.

Mark Haefele, Global Chief Investment Officer at UBS Wealth Management, said that after the recent sell-off triggered by technical factors, the market may have shifted from a “long-overdue correction” to a state of “over-adjustment.” James Bateman, Head of Multi-Asset Investing at Fidelity International, also believes that the volatility currently being observed could well be the clearest sign in a long time of the market’s genuinely healthy functioning.

As global stock markets experience sharp volatility, gold’s safe-haven appeal has become increasingly prominent. In A-share trading on the 6th, the gold sector also showed a counter-trend upward trend. Western Gold closed at the daily upper limit, while Chifeng Gold, Hengbang Shares, Hunan Gold, Zhongjin Gold, and Shandong Gold all posted gains to varying degrees.

Zhang Wei, a metals industry analyst at Zhuochuang Information, told a reporter from the Shanghai Securities Journal that international gold prices have been on a strong upward trend since mid-December last year. The industry had originally expected a pullback in the near term; however, selling pressure in the stock market has triggered risk-averse sentiment, providing some support for gold prices.

Zhang Wei said that the events likely to influence gold prices in the near term are primarily the market’s expectation that the Federal Reserve will raise interest rates again by 25 basis points in March, while the market will remain relatively accommodative beforehand. International gold prices are expected to experience volatility at the end of February.

“Based on past experience, it’s highly likely that gold prices will rise in the first quarter,” said Zhang Wei. He added that the U.S. tax reform policy, which is causing the U.S. dollar to continue depreciating, will also benefit gold. Overall, gold’s long-term trend is closely linked to the fight against inflation, and short-term events have only limited impact on gold prices.

According to Wind data, as international gold prices have recently risen, the in-market shares of four gold ETFs in the Chinese market have rebounded this year, with new assets reaching 246 million yuan.

Huang Jun, Chief Chinese Analyst at Gain Capital Group, is bullish on the yen’s performance. He believes that, given the yen’s inherent characteristics, buying yen in 2018 as a hedge against potential declines in global stock indices could become a standout feature of the market. Whether viewed from the perspectives of scale, liquidity, or exchange-rate risk, the yen possesses natural advantages for hedging against the risk of a global stock-market downturn.