'Major Bout of Volatility': Japanese Stocks Crash in Biggest Drop Since 1987
02:21 GMT 06.08.2024 (Updated: 02:28 GMT 06.08.2024)
© AP Photo / Eugene Hoshiko
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A carry trade is when an investor borrows in a currency with low interest rates – for example, the Japanese yen – and reinvests the proceeds into higher-yielding assets in another location, a CNBC report explained.
On Monday a rapid unloading of “carry trades” continued following a tumultuous weekend. Japanese stocks suffered their biggest loss since 1987 with the Nikkei 225 index losing a staggering 4,451 points and closing more than 12% down. This has caused Nikkei’s losses since early July to reach 25%.
One economist explained that the long positions against the Japanese yen for the Australian dollar, British pound, Norwegian krone and US dollar were all being taken off as fears of a US economic slowdown are causing global markets to panic.
Instead, safe-haven assets like the yen and the Swiss franc surged Monday which has prompted economists to speculate if investors may “quickly” unload profitable carry trades to cover their losses, the CNBC report added.
David Tawil, a co-founder of ProChain Capital, a multi-strategy crypto asset fund, joined Sputnik’s The Final Countdown Monday to discuss the tumultuous stock market activity.
“Every asset has its downsides. Even gold has not been performing the way people want and so there needs to be a repricing of assets here. It may take a little [time]. It may not be done today, but certainly one thing I can tell your audience is that we're going to see more volatility,” said Tawil.
The Japanese currency has strengthened dramatically against the US dollar in recent weeks, trading at 143.36 yen per US dollar at about 4:30 PM London time on Monday, the CNBC report added. Similarly, the yen fell to 161.96 per dollar in early July for the first time since December 1986. The report adds that alongside weak US economic data, the stock dive has been exacerbated by disappointing major tech earnings and a more aggressive Bank of Japan.
“...institutional investors – have long borrowed money in Japan at very low rates and gone ahead and put it into much higher yielding investments around the world. Essentially, the Bank of Japan became the bank of lending to a lot of very large hedge funds. People call it the carry trade,” Tawil explained. “Now, the Bank of Japan has started raising rates. There's a real quick concern about whether that carry trade can continue to exist certainly, let alone not at the same profitability as it once did."
“And so, if you go ahead and your borrowing rates get high or your borrowing channel closes, you effectively have to shut down or curtail a bunch of your investments, and that's what's been happening. Essentially, we've seen a liquidity suck out of the markets from a lot of large hedge funds, and that has really led to the sell-off.”
Some economists are voicing their concern that the US Federal Reserve has waited too long to cut interest rates as they take into consideration data that shows unemployment rates climbing. In July, the US unemployment rate climbed to 4.3% which is up 0.2% from June, according to a report from the Bureau of Labor Statistics that was released on Friday.
“In my view, this has very little to do with the Fed and very little to do with the US economy,” Tawil explained. “You will see people talk about a slowing US economy, potentially a recession. We had higher unemployment than we expected.”
On Wednesday, the Fed decided not to cut rates. Fed Chair Jerome Powell said that inflation has not dropped enough to justify rate cuts. The Fed first began raising interest rates in March of 2022 to combat inflation but stopped raising rates in fall of last year. Their hope is to see inflation lower back down to 2%, but add that they need to see maximum employment as well.
“This is not about the Fed. This is not about a quarter-point, a half a point, three quarters of a point in. As a matter of fact I am sure the Fed is thinking that if they go ahead and convene an emergency meeting at this point... It's okay if people lose money, it's okay if the market trades down,” he added.
“Things are not collapsing. There's a major bout of volatility, I get it. It has a lot to do with lots of things that are outside the Fed's control. The US economy is not tanking. It is not failing. Is there an increase for recession likelihood? I guess maybe based on jobs numbers on Friday. But, to be honest with you, I think if we wouldn't have had this sell-off, frankly, there would not have been talk of the US entering a recession.”
On Monday, the chipmaker Intel said it is cutting 15% of its workforce which will equal about 15,000 jobs as it struggles to compete with its more successful rivals including Nvidia and AMD.
“[Intel’s] stock is down major again today, but they're not the only chips maker that's going to go ahead and get hurt by a slowdown and certainly by a pullback in the markets and by businesses rethinking their spending. There may be a general slowdown that comes from this and maybe with respect to unemployment. And we're still at pretty record low unemployment, right, and that's been quite stubborn,” the economist added.
“So I think it's going to go out and translate into jobs, and that's not going to happen immediately. That's going to happen over the next couple of months.”
Regarding the crypto currency markets, Tawil explained that it may take a “longer time” to recover as some who trade crypto are looking to make a “quick buck” and may never come back to trade crypto currency because they have been scared off by the hit that the market has taken.
“This has not been an even-handed rally up until now, in terms of spreading the wealth. Certainly, people at the lower end of the socioeconomic spectrum feel as if they've gotten the raw end of this deal. But I don't think that the current trajectory is going to make things better for those folks. I actually think it's going to be a tougher environment for those folks,” said Tawil.
He added that people will likely slow their spending on services including food delivery and other "unnecessary" services and said that this will have an adverse effect on the gig economy as people may lose their safety net jobs.
“Unless there's something in your portfolio that is particularly offside, meaning it's a real reach in terms of a speculative investment. Then I'd simply go ahead and stay with the portfolio that you've got, to the extent that you can go ahead and take the opportunity, certainly add to positions where the price has gone down a lot and you really have a long term conviction,” he advised. “I'd go ahead and add to it. I wouldn't try to go ahead and trade this market all that much.”
