Market experts say the unwinding of the so-called “carry trade” with the Japanese yen is weighing on stock markets. REUTERS/Kim Kyung-Hoon
The unwinding of the global yen carry trade is putting pressure on stocks.
In recent years, investors in Japan have borrowed at low interest rates to invest in higher-yielding assets.
The Bank of Japan’s interest rate hike and possible Fed rate cuts triggered margin calls while the yen gained in value.
This is a machine translation of an article from our US colleagues at Business Insider. It was automatically translated and reviewed by a real editor.
Stocks crash due to yen “carry trade”
Stocks plunged on Monday, due in large part to the global unwinding of the yen carry trade, according to market experts.
The “carry trade” refers to investors who borrow money in Japan at near-zero interest rates 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.
Typically, the cheap money raised in Japan is channeled into higher-yielding U.S. Treasury bonds, with investors pocketing the difference between the interest rates set by the Bank of Japan and the Federal Reserve.
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.
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Yen strengthened after interest rate hike
The yen strengthened after the Bank of Japan unexpectedly raised interest rates by 15 basis points last week on the back of the Federal Reserve’s prospect of a rate cut, triggering a wave of margin calls that led speculators to unwind their positions and sell stocks.
“I think the evidence is that it’s a global sell-off, which suggests that a lot of money was borrowed 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 happen pretty quickly and the unravelling should be over by the end of the week,” Yardeni explained.
The unwinding of the yen carry trade will go down in history as the largest ever, Société Générale said in a note on Monday.
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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 to the future of the markets lies not in the performance of the Japanese yen, but in the performance of US tech stocks, says Juckes. “The rally was huge, valuations were stretched and Warren Buffett’s penchant for cash is back in the headlines. If this market continues to fall, it will affect the economy and the Fed,” says 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 think 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’re going to get a recession in the US.”
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