Black Monday

[moka]

I asked Perplexity AI how big the carry trade was and it said by 2007, it was estimated that about $1 trillion was involved in yen carry trades alone. 2007 is a long time ago.
But Motley Fool says -- an estimated $4 trillion.

https://www.nasdaq.com/articles/what...er-global-sell

What Is a Carry Trade, and How Did a Small Rate Hike in Japan Just Trigger a Global Sell-Off?
Why did markets around the world drop sharply on Monday? What does it have to do with the Bank of Japan? And what is a carry trade?
It turns out those questions are all closely related.

For months, market observers have been talking about a popular trade in which investors borrowed in Japanese yen at very low interest rates, and then invested the borrowed money in high-growth investments like the "Magnificent Seven" stocks.
Borrowing cheaply to buy higher-returning investments is called a "carry trade." It's a common strategy for a good reason: Carry trades can be very profitable as long as they work.

But when a popular carry trade abruptly stops working, the effects can be widespread.

Concerns about the carry trade had been rising for weeks, in part because of the enormous amount of money involved in it -- an estimated $4 trillion. Those concerns soared on July 31, when the Bank of Japan raised interest rates from 0.1% to 0.25%

Consider: If you had borrowed 10 million yen a month ago and immediately converted it to U.S. dollars, you'd have had about $62,000. But given the way the yen has surged recently, you would need about $70,000 to pay back that loan today -- even without taking interest and fees into account.

Put another way, you need to have made roughly 13% on that borrowed money in one month just to break even on the loan. That's a much bigger deal than the Bank of Japan's 0.15% interest rate hike.

Given that there was an enormous amount of money involved in this particular carry trade, the unwinding is having massive effects in markets around the world as investors sell stocks and other assets in order to repay those loans.

[flyinglizard]

I asked Perplexity AI how big the carry trade was and it said by 2007, it was estimated that about $1 trillion was involved in yen carry trades alone. 2007 is a long time ago.
But Motley Fool says -- an estimated $4 trillion.

https://www.nasdaq.com/articles/what...er-global-sell

What Is a Carry Trade, and How Did a Small Rate Hike in Japan Just Trigger a Global Sell-Off?
Why did markets around the world drop sharply on Monday? What does it have to do with the Bank of Japan? And what is a carry trade?
It turns out those questions are all closely related.

For months, market observers have been talking about a popular trade in which investors borrowed in Japanese yen at very low interest rates, and then invested the borrowed money in high-growth investments like the "Magnificent Seven" stocks.
Borrowing cheaply to buy higher-returning investments is called a "carry trade." It's a common strategy for a good reason: Carry trades can be very profitable as long as they work.

But when a popular carry trade abruptly stops working, the effects can be widespread.

Concerns about the carry trade had been rising for weeks, in part because of the enormous amount of money involved in it -- an estimated $4 trillion. Those concerns soared on July 31, when the Bank of Japan raised interest rates from 0.1% to 0.25%

Consider: If you had borrowed 10 million yen a month ago and immediately converted it to U.S. dollars, you'd have had about $62,000. But given the way the yen has surged recently, you would need about $70,000 to pay back that loan today -- even without taking interest and fees into account.

Put another way, you need to have made roughly 13% on that borrowed money in one month just to break even on the loan. That's a much bigger deal than the Bank of Japan's 0.15% interest rate hike.

Given that there was an enormous amount of money involved in this particular carry trade, the unwinding is having massive effects in markets around the world as investors sell stocks and other assets in order to repay those loans.

you are right about Yen carry trade. The first time that I heard about that was at business school of University of Canterbury in 2004/2005.

[Newman]

I asked Perplexity AI how big the carry trade was and it said by 2007, it was estimated that about $1 trillion was involved in yen carry trades alone. 2007 is a long time ago.
But Motley Fool says -- an estimated $4 trillion.

https://www.nasdaq.com/articles/what...er-global-sell

What Is a Carry Trade, and How Did a Small Rate Hike in Japan Just Trigger a Global Sell-Off?
Why did markets around the world drop sharply on Monday? What does it have to do with the Bank of Japan? And what is a carry trade?
It turns out those questions are all closely related.

For months, market observers have been talking about a popular trade in which investors borrowed in Japanese yen at very low interest rates, and then invested the borrowed money in high-growth investments like the "Magnificent Seven" stocks.
Borrowing cheaply to buy higher-returning investments is called a "carry trade." It's a common strategy for a good reason: Carry trades can be very profitable as long as they work.

But when a popular carry trade abruptly stops working, the effects can be widespread.

Concerns about the carry trade had been rising for weeks, in part because of the enormous amount of money involved in it -- an estimated $4 trillion. Those concerns soared on July 31, when the Bank of Japan raised interest rates from 0.1% to 0.25%

Consider: If you had borrowed 10 million yen a month ago and immediately converted it to U.S. dollars, you'd have had about $62,000. But given the way the yen has surged recently, you would need about $70,000 to pay back that loan today -- even without taking interest and fees into account.

Put another way, you need to have made roughly 13% on that borrowed money in one month just to break even on the loan. That's a much bigger deal than the Bank of Japan's 0.15% interest rate hike.

Given that there was an enormous amount of money involved in this particular carry trade, the unwinding is having massive effects in markets around the world as investors sell stocks and other assets in order to repay those loans.

This helps explain the decrease in the US stock market, but why did the Nikkei drop 12.5% yesterday?

[moka]

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[moka]

This helps explain the decrease in the US stock market, but why did the Nikkei drop 12.5% yesterday?

The Nikkei 225, Japan's main stock index, experienced a dramatic 12.4% drop on Monday, August 5, 2024, marking its worst single-day decline since the "Black Monday" crash of October 1987. This significant plunge was primarily driven by two key factors:

U.S. economic concerns:

Investors were worried that the U.S. economy might be in worse shape than previously expected. This concern was fueled by weaker-than-expected U.S. July jobs data, which heightened fears of a potential recession. As the United States is a major trading partner and economic influencer for Japan, negative economic indicators from the U.S. can have a substantial impact on Japanese markets.

Strengthening yen:

The Japanese yen strengthened to its highest level against the U.S. dollar since January, trading at around 145.42 yen per dollar. A stronger yen can negatively impact Japanese exporters by making their products more expensive in foreign markets and reducing the value of overseas earnings when converted back to yen. This particularly affected heavyweight trading houses and export-oriented companies, with some seeing drops of more than 10%.

The sell-off was widespread, affecting a broad range of companies across various sectors. The drop followed a previous decline of 5.8% on Friday, resulting in the Nikkei's worst two-day decline ever, with a total drop of 18.2% over two trading sessions. It's worth noting that this sharp decline also brought the Nikkei and the broader Topix index close to bear market territory, having fallen almost 20% from their all-time highs reached on July 11, 2024.
Answered by Perplexity AI

[Aaron]

So the lesson from this is rising interest rates bad, low interest rates good?

Had the JCB not raised rates the yen would have got even weaker so on top of the yield on the carry trade they were also making foreign exchange gains when it came time to repay the debt.

No downside to weak currencies especially if you have a lot of debt?

With rate cuts coming then I guess it is still BTFD.

[audiav]

If you follow The Secret Broker (of Stockhead fame) on Twitter, has some interesting observations. This is one, if link works https://x.com/secretbrokerau/status/...an5cMIZu6pUj5Q

[moka]

This article mentions the carry trade.

Live: Top companies lose US$800 billion in value as NZX opens down | RNZ News

Top companies lose US$800 billion in value as NZX opens down

US share markets posted heavy losses on fears the American economy is headed for recession.
When markets closed at 8am (NZT), the broader S&P 500 index fell 3 percent.
The Dow Jones Industrial Average closed down 2.6 percent and the tech-heavy Nasdaq fell 3.4 percent. Earlier, the Nasdaq opened 6.3 percent lower, but clawed back some of the losses after data showed US services sector activity rebounding in July.

Tech stocks taking harder hit
Volatile trading expected to continue

Volatile trading in markets is expected to continue over the rest of the week, if not longer as investors close out of high risk positions. The sell-off of risk assets was expected to continue given the size of the carry-trade, estimated about US$4 trillion dollars.
Speizer said risky currencies like the Australian and New Zealand dollars, the Norwegian kroner were vulnerable to downside risk, as well as some equities, subsets of equity markets, such as tech sector stocks.He said the market will watch with interest to see how the Reserve Bank of Australia reacts to the turmoil, when it releases its decision on whether to hold its official cash rate at 4.35 percent, later this afternoon.

Magnificent Seven set to shed US$800 billion in value
Apple, Tesla, Alphabet and Amazon each dropped more than 4 percent, while Nvidia tumbled 7 percent, and Microsoft and Meta Platforms fell 3 percent as worries about a potential US recession compounded investor concerns about massive spending to build AI infrastructure.

[moka]

No mention of the carry trade in this article which was the trigger for the sudden drop. Article quotes Westpac chief economist Kelly Eckhold,
The way propaganda works now is selective presentation of facts: Propagandists often cherry-pick information, presenting only facts that support their narrative while omitting contradictory evidence. This creates a distorted view of reality that can be difficult for the average person to recognize.

What's actually going on with sharemarkets? | RNZ News

New Zealanders woke to headlines about sharemarket carnage overnight. The S&P 500 closed down 3 percent, the Nasdaq by about 3.4 percent, the Nikkei by a dramatic 12.4 percent, and even the ASX 3.7 percent - a A$100 billion "wipe out" of investor value.
So what's caused this?
Earnings
Weaker jobs data
Interest rates
Tech stocks
Geopolitical tensions
And what about bitcoin?
How bad is it really?

Westpac chief economist Kelly Eckhold said sometimes the New Zealand dollar would come under pressure in these types of conditions but so far it has held up. "It's different than in the GFC when the NZD was getting trashed."

It's different this time – yeah right!

[X-men]

Dow future is up! The world is ok now when Dow ups!