If anyone asks you what, exactly, happened to markets on Monday — a session that’ll live in infamy even as Wall Street managed to claw back some losses into the US afternoon — just tell them that August 5, 2024, marked the culmination of an across-the-board global carry unwind.
On July 25, I attempted, without a lot of success I suspect, to communicate the potential for a multi-week yen surge to create serious problems should it run too much further. The Bank of Japan was rumored to be considering a second rate hike as soon as the July policy meeting, and if they pulled the trigger, it’d add fuel to the fire for the yen, which was fast becoming a wrecking ball.
I didn’t actually think Kazuo Ueda would go through with it. But he did. The BoJ delivered a hawkish hike. And during a week when the US macro turned, precipitating a monumental front-end rates rally punctuated by extremely aggressive Fed-cut wagers placed against the shrill wailing of the Sahm siren.
“The first issues began three to four weeks ago, with crowded carry stop-outs via the yen impact,” Nomura’s Charlie McElligott said Monday. “But [it’s] since spread into broad risk-premia, from momentum and trend trades that had been working to VRP and mean-reversion, now water-falling in unison.”
The figures above, from Charlie, illustrate the point. That’s your knock-on from the carry crisis, and you can see how it escalated over the past few sessions.
On Monday, it all crescendoed in an outright crash. What happened to Japanese stocks was an honest-to-God meltdown. Nothing less than an old school panic.
But, again, the ripple effects from the BoJ are well and truly global. The yen’s the most popular funder on Earth and all of a sudden, the central bank’s hiking hawkishly. You can’t fund in yen for free anymore. That’s over now. And there’s a very real sense in which the shift represents an adjustment to the global market infrastructure, necessitating a wholesale rethink.
It’s useful, at times like these, to hear from veterans who’ve been around for a long time. SocGen’s Kit Juckes is one such person. “You can’t unwind the biggest carry trade the world has ever seen without breaking a few heads,” he wrote, before suggesting that if the universe does implode, it actually won’t be because the yen breached any magic threshold. Rather, it’ll be because the US tech bubble burst.
“The biggest threat to market stability isn’t what the FX market does, but what US equities, particularly tech stocks, do,” Juckes said. “The rally was huge, the valuations were stretched and if that market keeps falling, it will affect the economy and the Fed.”
Well, GOOG did just lose a lawsuit.
That definitely has my attention. Are we about to enter a new era of trust busting?
This is not trust busting. This is trying to tell businesses how to design their products and manage their services in whole new ways – essentially saying “hey, nice businesses you built. Now we want you to turn them into public utilities”.
You misspelled “monopoly”.
It’s hard to believe the Nasdaq was below 14k a year ago and closer to 10k less than 2 years, but I would be ecstatic if the Nasdaq dropped back to that range. I went long on bonds a couple months ago and it’s been a nice run, but I wouldn’t hesitate to rotate back to the Nasdaq 100 if it pulls back another 10%.
Ben Emons, an “informed” talking head on CNBC , estimates the short interest in Japanese Yen forwards and futures had reached $4 trillion, based on IMF and CME data.
If he is even remotely close, these carry trades will take more than three days to clear out.
I don’t know how this stuff works, but isn’t there someone else on the other side of those trades? So…more like $2T.
Not sure where I saw this, so value accordingly, but I read the total margin in Japanese equities was about USD 50BN, which seems capable of being cleared in a couple horrific days. Avg daily vol in Japan equity is like JPY 5TR or USD 33BN.
The top carry trade artists are not using the money raised (in US$) to buy Japanese shares. They’re buying Mexican Peso bills etc where there is a significant yield pickup versus the borrowing costs on their yen shorts. It’s a simple interest rate arbitrage which is so much better when you can lever it up by 5 or 10 times,.
Been talking about that trade since Feb 2022. It has been a belter!