Manic Monday followed by turnaround Tuesday
Last week the Japanese Central Bank (BoJ) raised interest rates to 0.25% and discussed a plan to unwind its massive bond buying program. The walk towards the exit of the famous yen-carry-trade turned into a run and sparked a broader selloff. I’m not convinced this was the only reason. I feel the market has been slow to understand what higher for longer meant. I also think that the war in the middle east is heating up more than the market anticipated.
Now a quick primer on what the yen-carry-trade means. In the market, you can go long (which means you are a buyer) or you can go short (which means you are a seller). When you go short on a stock, you are selling the stock before you buy it. You pay a fee to do this as you’ll need to borrow the shares to short them but you get the proceeds of the sale immediately. You can then use those funds to buy something else. This is what it means to have a carry trade. In the instance of the yen-carry-trade, large funds were selling the Japanese currency (yen) in the FX market for US dollars, then taking those dollars and buying stocks. This added leverage and can really juice a return. However, leverage cuts both ways. On the way up it is euphoric but on the way down, it is the stuff of nightmares.
To unwind this trade, those large funds that borrowed yen would need to sell their stocks and use the proceeds to buy back the Japanese currency.
This was a popular trade for many years and I don’t think it is going to unwind in one trading session, one week, or even one month. This is going to be a process. If it gets disorderly, it could be a very exciting time to buy. Looking at a weekly chart of the S&P, it appears that this has been unwinding for a few weeks and we have retraced to the March ‘24 levels.
Worries abound and panic creates selling pressure but it looks like the swap lines the Fed setup with foreign central banks and the reverse repo facility have both been “working as planned”. These liquidity conduits are currently preventing a 2020 or 2008 style credit crunch and are allowing for an orderly (although painful) unwind.
Does this mean this is a buying opportunity?
I feel that there are opporunities to buy. This is where my portfolio is today: