Market experts say the unwinding of the so-called “carry trade” with the Japanese yen is weighing on stock markets. – Copyright: REUTERS/Kim Kyung-Hoon
Stocks crash due to yen “carry trade”
Die Shares plunged on Monday, which market experts say was largely due to the global unwinding of the yen “carry trade.”
The “carry trade” refers to investors who are in Japan Borrow money at interest rates close to zero and then move that money into higher-yielding assets around the world, such as stocks and bonds. “The sell-off here is due in large part to the unwinding of the so-called ‘carry trade,'” explained Ed Yardeni Yahoo Finance on Monday.
Normally, the cheap money raised in Japan is channelled into higher-yielding US government bonds, with investors paying the difference between the interest rates set by the Bank of Japan and the Federal Reserve. Interest rates collect.
However, in times of strong risk-taking, such as the long bull market that has fueled the stock market since the rally began in November 2022, the yen “carry trade” has spilled over to other assets such as stocks.
“They took that money and invested it in assets all over the world, including the Magnificent 7, Mexican assets, Brazilian assets, and some of it didn’t go that far but went into the Japanese stock market,” Yardeni said.
Yen strengthened after interest rate hike
After the Bank of Japan unexpectedly raised interest rates by 15 basis points last week because the Federal Reserve When the Japanese government threatened to cut interest rates, the yen strengthened. This triggered a wave of margin calls, which led to speculators unwinding their positions and selling stocks.
“I think the evidence is that it is a global sell-off, which suggests that a lot Money in Japan at zero percent interest and used for speculation in other parts of the world, and I think that’s all unravelling, and I think there’s a lot of margin calls, and I think it’s going to be pretty quick and the unravelling should be over by the end of the week,” Yardeni explained.
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The reversal of the yen carry trade is considered the largest of all time in Story Société Générale said in a note on Monday.
Risk in the development of US tech stocks
SocGen chief currency strategist Kit Juckes said that while he viewed Monday’s plunge with suspicion as “big moves on Mondays tend to happen in a vacuum,” there was still room for downside in the stock market and economy.
The risk for the future of the markets lies not in the development of the Japanese yen, but in the development of US tech stocks, says Juckes. “The rally was enormous, the valuations were overstretched and Warren Buffett’s preference for cash is making headlines again. If this market continues to fall, it will affect the economy and the Fed,” according to Juckes.
Yardeni maintained his positive view on equity markets despite the sharp rise in market volatility. “It’s too late to panic, that’s my take on this sell-off,” Yardeni said.
Yardeni continued: “I believe the economy is improving and I blame the weather for a lot of the weakness in the July jobs report (…) and I still don’t think we have a recession in the USA.”
Read the original article on Business Insider
