The crash in world equity markets in recent days reflects more the wind trade used by investors to make bets than any hard and fast change in the outlook for the US economy, analysts say.
While Friday’s (August 2, 2024) weaker-than-expected US jobs data was the catalyst for a market sell-off, with Japan’s blue-chip Nikkei index on Monday (August 5, 2024) suffering its biggest one-day loss since the 1987 Black Monday selloff, reports Employment alone is not weak enough to be the main driver of such a violent movement, they added.
However, the answer may lie in a clearer position to carry out trade, where investors have borrowed money from economies with low interest rates such as Japan or Switzerland, to finance investments in higher-yielding assets elsewhere.
They were caught as the Japanese yen has rallied more than 11% against the dollar from a 38-year low over the past month.
“In our assessment, many of these (market selling) have come down to capitulation positions because some macro funds have been caught in the wrong way in trading, and stops have been triggered, initially starting with FX and the Japanese yen,” said Mark Dowding, head of investment in BlueBay Asset Management, it shows the predetermined level that triggers buying or selling.
“We don’t see evidence in the data that says we’re looking at a hard landing,” he added.
An Asia-based investor, who asked not to be identified, said some of the largest systematic hedge funds that trade in and out of stocks based on signals from algorithms began selling equities when the Bank of Japan’s (BoJ) rate hike surprise came last week. expectations for further tightening.
While the exact numbers and specific position changes underlying the move are hard to come by, analysts suspect that crowded positions in U.S. tech stocks, funded by the trade, explain why they have suffered the most.
At 1423 GMT on Monday (5 August 2024), the tech-heavy US Nasdaq stock index was down more than 8% so far in August, versus 6% for the broader S&P index.
Carrying on the trade, fueled by years of Japan’s ultra-easy monetary policy, has led to a boom in cross-border yen lending to finance trade elsewhere, ING said.
Bank for International Settlements data shows that cross-border lending has increased by $742 billion since the end of 2021, the bank said.
“It’s yen-financed to unwind and Japanese stocks unwind,” said Tim Graf, head of macro strategy for Europe at State Street Global Markets.
“Our position metrics show Japanese stock investors are overweight. They are underweight the yen. They are not underweight the yen.”
Speculators have cut bearish bets on the yen aggressively in recent weeks, bringing net short positions in the yen to $6.01 billion, the smallest since January, down from April’s seven-year high of $14.526 billion, the latest weekly data from US market regulators showed.
“You can’t break the world’s biggest carry trade without breaking a few heads,” said Societe Generale currency strategist Kit Juckes.
Hedge fund pain
As hedge funds typically finance their bets through debt, the adjustment added to market movements, some investors said.
Banks leverage hedge funds, essentially loans to investment funds, which increase hedge fund returns but can also increase losses.
A note sent by Goldman Sachs to clients on Friday shows that the gross leverage of Goldman Sachs’ main intermediaries, or the total amount that hedge funds have borrowed, declined in June and July, but still sits near a five-year high.
Last week marked the third consecutive week that hedge funds’ bets that stocks will fall outpaced In addition to bets that will rise, Goldman said in a separate note, saying one long position is added for every 3.3 short bets.
It added on Monday (August 5, 2024) that at the Asian close, Japan-focused hedge funds fell 7.6% over the past three trading sessions. While macro funds may be involved in trading currencies linked to the yen, many hedge funds trading stocks, due to the ban on selling in June in South Korea and regulatory issues against similar practices in China, have focused on Japanese investors. said.
More pain
Analysts added that there is room for short-term pain as positions are not disposed of, but the market will be limited. Traders now expect more than 120 basis points of rate cuts in the US by the end of the year, up from about 50 basis points at the start of last week, and on par with September’s 50 basis point cut.
Those expectations may be overdone if upcoming data shows the U.S. economy will avoid bankruptcy. “We think it’s a mistake to start re-evaluating your view here. Doing so only fits the narrative that matches the price action,” said BlueBay’s Dowding.
