The numbers flashing across stock screens on Monday were shocking even to market veterans.
In Tokyo, the Nikkei fell 12%. In Seoul, the Kospi sank 9%. And when the opening bell rang in New York, the Nasdaq plunged 6% in seconds. Cryptocurrencies plunged. The VIX, a gauge of stock market volatility, soared and investors piled into Treasuries, the safest asset of all.
Whether Monday’s wild swings mark the final blowout of a global sell-off that began to develop last week or mark the beginning of a protracted downturn is impossible to know.
However, the mood today Tuesday is diametrically opposed: shares in Japan are recording a rally, which even exceeded 10%.
The Nikkei on Monday posted its worst performance since the October 1987 crash as investors were rattled by last week’s plunge in global stock markets, risks of a US recession and worries about investment financed by a cheap yen.
Recovery in the S&P and Dow Jones are also showing futures, after gains of around one percentage point, while the main European stock markets are also expected to open higher.
What will happen in Athens?
The opening of the Athens Stock Exchange is expected with particular interest, where the general index was yesterday in a free fall of 6.27%.
Monday’s crash was a “reminder that it’s nearly impossible to diversify equity risk by region (or by sector or style) during big corrections or profit-taking,” said Stephen Dover, chief market strategist and head of the Franklin Templeton Institute. .
“An opportunity will arise, but in our view, it is premature to intervene at this point.”
Similar to that of Japan – but clearly softer – is the picture in other Asian stock markets.
Oil is also moving upwards, with Brent rising 1.65% to $77.56 a barrel and the American West Texas Intermediate gaining 1.86% to $74.30.
The role of the carry trade in global markets
Analysts, however, believe that the collapse in global stock markets in recent days reflects more the collapse of so-called carry trades (interest rate arbitrages) that investors use to hedge their bets, rather than a hard and fast change in the U.S. economic outlook, they say. the analysts.
They even point out the obvious: although weaker-than-expected US jobs data was the catalyst for the market sell-off, the jobs report alone could not be enough to be the main lever of such violent movements. They have been caught in their net as the Japanese yen has risen more than 11% against the dollar since hitting 38-year lows just a month ago.
Instead, the answer likely lies in the further easing of carry-trades, where investors have borrowed money from low-interest-rate economies like Japan or Switzerland to fund investments in higher-yielding assets elsewhere.
“In our view, much of this (market sell-off) is due to capitulation, as some macro funds were caught on the wrong side of a trade and stops were triggered, initially starting with the forex and the Japanese yen,” explains Mark Dowding , chief investment officer at BlueBay Asset Management, referring to predetermined levels that trigger a buy or sell.
“We are considering a hard landing”
“We don’t see any evidence in the data that says we’re looking at a hard landing,” he added.
An Asian investor, who asked not to be named, told Reuters that some of the biggest systematic hedge funds that trade in and out of stocks based on signals from algorithms began selling stocks when the Bank of Japan’s surprise rate hike last week fueled expectations of further tightening.
While the exact numbers and specific position changes underlying the moves are hard to come by, analysts suspect crowded positions in U.S. technology stocks, funded by carry trades, explain why they are suffering the most.
Carry trades, boosted by years of ultra-loose Japanese monetary policy, have fueled a boom in cross-border yen borrowing to finance deals elsewhere, ING said.
Data from the Bank for International Settlements suggests that cross-border yen lending has increased by $742 billion since the end of 2021, the bank noted.
The shorties
Speculators have aggressively trimmed bearish bets against the yen in recent weeks, bringing the yen’s net short position to $6.01 billion, the lowest since January, from April’s seven-year high of $14.526 billion.
“You can’t have the biggest carry trade the world has ever seen unfold without some heads breaking,” said Societe Generale chief currency strategist Kit Juckes.
The blow to hedge funds
As hedge funds typically finance their bets through borrowing, their adjustments exacerbate market movements. It is noted that banks provide leverage to hedge funds, essentially a loan to invest capital, which boosts hedge fund returns, but can also increase losses.
A note sent by Goldman Sachs to clients on Friday showed that gross leverage by Goldman Sachs prime brokerage, or the total amount hedge funds have borrowed, fell in June and July but is still near the high fives years.
Last week was the third week in a row that hedge funds’ bets that stocks will fall outpaced new bets to rise, Goldman said in a separate note, saying one long position was added for every 3.3 short bets.
It also said on Monday that since the Asian close, Japan-focused hedge funds have fallen 7.6% in the past three sessions.
Analysts added that there is room for further near-term pain as positions unwind, but market upside would be limited.
The image on Wall Street
Major U.S. stock indexes fell sharply on Monday, with the Nasdaq down more than 3 percent and the Dow Jones logging its worst day in two years as worries about a U.S. recession rattled global markets and sent investors out of risky assets.
THE Dow Jones fell by 1,033.99 points or 2.60% to 38,703.27 points, the S&P 500 lost 160.23 points, or 3%, to 5,186.33 and the Nasdaq fell 576.08 points, or 3.43%, to 16,208.o8.
European stock markets plunged at the pace of the global equity sell-off, although they pared their losses towards the end of the session.
The pan-European Stoxx 600 closed down 2.2% at 486.79, paring a more than 3% drop, as the technology sector recovered some ground to close 1% lower. However, all sectors and major stock markets finished in the red, with utilities and oil and gas stocks losing more than 3%.
The German DAX closed with losses of 1.95% at 17,317.58 points, the British FTSE with a negative sign of 2.04% at 8,008.23 points and the French CAC40 with losses of 1.42% at 7,148.99 points.
Athens Stock Exchange: Free fall of 6.27% – 5.9 billion “lost” from capitalization
The Athens Stock Exchange found itself in the midst of the global sell-off today, with share prices registering a free fall, leading the market to levels of 1,340 units.
The Greek stock market followed the negative sentiment and the “sell-off” of shares in the international markets, which are retreating amid concerns about a possible recession in the American economy.
SOURCE: ot.gr
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