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Analysts believe a recent crash in foreign equity markets is more due to investors winding down carry trades than a shift in the U.S. economic outlook.
They added that Friday’s weaker-than-expected U.S. jobs data caused the market sell-off, with Japan’s blue-chip Nikkei index on Monday suffering its biggest one-day rout since the 1987 Black Monday selloff, but the report alone wasn’t enough to cause such violent moves.
A further sharp position unwinding carry trades, opens new tab, when investors borrowed money from low-interest countries like Japan or Switzerland to invest in higher-yielding assets, may be the answer.
They were caught off guard as the Japanese yen rose more than 11% against the dollar from 38-year lows a month ago.
“In our assessment, a lot of this (market sell-off) has been down to position capitulation as a number of macro funds have been caught the wrong way around on a trade, and stops have been triggered, initially with FX and the Japanese yen,” said BlueBay Asset Management chief investment officer Mark Dowding.
“We don’t see evidence in data that’s saying we’re looking at a hard landing,” he said.
When last week’s unexpected Bank of Japan rate hike raised expectations for additional tightening, some of the largest systematic hedge funds that trade stocks based on algorithmic signals started selling shares, according to an Asian investor who requested anonymity.
Although exact figures and positioning adjustments are hard to come by, analysts speculated that crowded positions in U.S. tech companies, supported by carry trades, explain why they are suffering the most.
In August, the tech-heavy U.S. Nasdaq stock index was down almost 8%, compared to 6% for the S&P index as of 1423 GMT on Monday.
ING said years of ultra-easy Japanese monetary policy supported carry trades, which spurred cross-border yen borrowing to fund other trading.
The Bank for International Settlements reported a $742 billion increase in cross-border yen borrowing since 2021.
“It’s a yen-funded carry unwind and Japanese stock unwind,” said State Street Global Markets Europe macro strategy director Tim Graf. According to our metrics, investors like Japanese stocks. Yen were underweight. The yen are no longer underweight.”
The U.S. markets regulator’s most recent weekly data reveals that speculators have aggressively trimmed bearish wagers on the yen, reducing the net short position to $6.01 billion, its lowest since January, from April’s seven-year peak of $14.526 billion.
NYSE traders work on the floor in New York City, June 24, 2024. File photo purchase licensing rights
“You can’t unwind the biggest carry trade the world has ever seen without breaking a few heads,” said Societe Generale head currency strategist Kit Juckes.
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