September 2024
Dear Friends, Dear Investors,
The month of August started with a bang, with one of the biggest carry trades blowing up in a spectacular fashion. For years (and especially in the last twelve months), speculators had borrowed the Japanese Yen (JPY), which was very cheap to borrow (as rates have hovered around 0% in Japan) and had invested the proceeds in Japanese stocks, US Treasury bonds and US stocks.
Investing in Japanese equities on leverage made some sense (for speculators) because Japanese companies (at least some of them) are finally turning the corner after a 30-year long malaise. Investing in assets denominated in other currencies (in particular the US dollar) adds another layer of risk: if, suddenly, the JPY appreciates against the USD and US equities fall, you face a double squeeze, and that is effectively what happened.
The Nikkei lost more than 20% in just three days, effectively experiencing its own October 1987 moment. Measures put in place back then effectively prohibit a market falling more than 20% in a day, but that was close enough.
The giant margin call triggered a massive selling wave that reverberated across the world (since it happened on a Sunday night, liquidity was extremely poor as well) and leveraged players sold because they had to, not because they wanted to (that is, after all, the danger of leverage). Volatility shot up briefly to levels not seen since the Great Financial Crisis of 2008 and the Covid crisis of 2020. These volatility levels normally do not occur outside of massive crises and this one seems to be the exception, as there is no real crisis to speak of (apart from the slow crash in China, which we will continue to discuss). Interestingly, the same was true after the crash of 1987.
This is corroborated by the fact that, despite all the hullabaloo, most markets ended the month in positive territory. Having said that, volatility spikes mirror earthquake events: you have a massive one first and then you get some aftershocks. Volatility generally does not come down at once, but rather spikes again a few times, and we will probably witness these aftershocks in the coming weeks and months.
We remain, however confident. In the United States, the signs of a slowdown remain relative. New job creations are low, but business results are, overall, very good. Furthermore, inflation is falling and the FED is seriously considering a rate cut. In Europe, the situation is a little more complex with a somewhat more persistent inflation and a deterioration in business confidence, especially in Germany. Yet, the job market is resilient, and real income is increasing. Furthermore, the FED's decisions should influence the ECB to accelerate its rate cut as well.
Best regards,
Sinews Global Team
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