If you were wondering whether the selling was over — whether last week’s risk-off tone was poised to dissipate — the answer on Monday in Asia was an emphatic “no.”
I won’t bury the lede: Monday, August 5, 2024 was one of the worst days in history for Japanese equities.
Recall that local shares were coming off a very tough session on Friday when the Topix dove 6%, capping a $600 billion wipeout on the heels of the Bank of Japan’s second rate hike of 2024. If you thought that was bad, you hadn’t seen anything yet.
The Japanese benchmark on Monday plunged a difficult-to-believe 12%. And no, that’s not a typo. Japanese equities lost 12% of their value in a single session.
Monday’s rout was the largest selloff since since 1987, which is to say it has no modern precedent.
Do note: It was just a month ago when the Topix finally took out its 1989 record high. Since then, the gauge has fallen nearly 25%.
There really are no words for Monday’s debacle. Double-digit, singe-session declines on major developed market equity benchmarks are exceedingly rare. This was a day for the record books, and it brought the three-session decline for Japanese stocks to a mind-boggling 22%. Read that again: Japanese equities lost more than a fifth of their value in the short space of three business days. Monday looked — and surely was in many respects — like one giant margin call in Japan.
The yen surged another 3% at the USDJPY lows as the policy read-through for the Fed from a downshift in the US labor market (and the perception of rising US recession odds) undercut the dollar, stoking additional yen strength atop what was already a very pronounced multi-week rally.
The figure above’s remarkable. The yen surge since the beginning of July now exceeds 11%.
The currency’s abrupt turn began to cause serious problems late last month. Now it’s wreaking havoc. Full stop. There’s a massive, across-the-board carry unwind afoot.
A gauge of expected fluctuations on the Nikkei 225 doubled on Monday, quite a feat considering it rose sharply on Friday.
The higher the level, the wilder the moves market participants expect. And the gauge is now the highest in over a decade.
The suffering — the acute suffering — wasn’t confined to Japan. The MSCI Asia Pacific benchmark fell into a correction while erasing the entirety of its 2024 advance, South Korean shares tumbled nearly 9% and the Taiex fell 8.35% for its worst session ever.
Again, it’s difficult to find the right adjectives to describe these losses. This was a veritable crash. An unmitigated wipeout. “Markets were on edge before Friday but weak [US] payrolls has really escalated a profound move across the globe,” Deutsche Bank’s Jim Reid remarked.
Profound indeed.
Are there any ways to measure the importance of the carry trade in the overall leverage our financial system takes advantage of?
Good question.
Exhibit One is the large weakening movement in the Mexican Peso over the last few days as carry trades funded by short Yen positions are stopped out.
It’s been a while since we’ve seen the poor carry traders but through the wringer like this. It’s so sad – the Fed should step in and do something to shield them from further losses!
I’m feeling nostalgia for Mr. Kuroda !! Was any benefit from raising the Japanese rate 15 basis points worth all this capital destruction and loss of confidence in the markets.
Cuts are coming. How much, how soon? If credit markets close, it will be immediate. Otherwise I believe the fomc waits. It looks like we will be getting 100 bps between now and year end.
Looks like margin call time here in the U.S. as well.
Possibly one could use money flow in each asset class in the last couple days to estimate the size and allocation of the JPY/USD carry trade. Someone like McElligott could, anyway.
The apparent allocation to risky assets like Bitcoin and equities is a surprise to me. I thought of the carry trade as interest rate arbitrage, not as cross-border margin trading. As such I thought the main target of the carry trade was shorter duration fixed income.
The tanking of Japanese equities is also a surprise to me. How is that related to JPY/USD carry unwind?
I’m curious who the lenders are for the carry trade. With carry traders out (for now), those lenders need to find other borrowers or investments. Given the apparent size of the carry trade, that’s a lot of capital looking for a home.
In many cases the masers of the universe raise funds by selling short a “funding currency” and use the proceeds to buy a currency sporting a higher yield, such as the Mexican Peso. It’s a self-funding utopia! Until something goes wrong.
Enjoying your vacation?
Ah so, carry is the vehicle to raise funds and the ultimate profits are made in risky assets, rather than carry being the ultimate profit vehicle? Sounds greedy.
Does this reach back to Japanese equities? Seems circular to sell JPY, buy USD, sell USD, buy Japanese equity.
How goes vacation – other than inconvenient timing, starting out fine. Trying to switch my headspace back and forth between OMFG! to nature drawing.
I’m just referring to early versions of the carry trade which I witnessed first hand. Sell the low yielding currency to fund purchases of higher yielding currencies. Some may use the proceeds to but shorter-term debt.
It’s not terribly different from selling a stock short and using the money raised to buy another – a classic pairs trade.
So, not sure how much spillover there was to Japanese shares. I sense that we enjoyed a tidal wave of buying there by dedicated Asia-Pacific fund managers who bailed out of “uninvestable” Chinese shares and bought India and then Japan. Thanks to their mandates, they did not have the leeway to just sell China and park the cash.
PS – when you are drawing, think about how much more beautiful the scene would be if a developer came in and built a nice complex of condos and time shares there!
The iron coffin lid remains undefeated.