FNArena’s Weekly Insights – August 05 2024
August Results: Polarisation & Divergence
By Rudi Filapek-Vandyck, Editor
It’s difficult to keep the focus on corporate market updates when panic selling is causing risk assets to suffer heavy retreats in August. This is not about investor exuberance, concentrated market positions or inflated valuations, even though these items combined were responsible for US share market conniptions in late July.
What markets are experiencing since last week is the unwinding of the so-called Yen carry trade. This practice whereby hedge funds and large asset managers borrow money in low-cost Japan and then invest those borrowings in risk assets in high-yielding currencies has been in place for many years.
The Bank of Japan’s unexpected rate hike last week upset the apple cart and many of such positions -worth hundreds of billions of dollars- are being unwound in rapid manner. All at once and at the same time, of course. The impact on equities worldwide is there for everyone to see.
So don’t beat yourself up if you didn’t anticipate this violent change in overall dynamics, very few did. It’s a process and it will simply have to run its course.
Other factors that have been contributing to the rather downbeat sentiment overall at the start of August are more signs of slowing for the US economy and increased scepticism among investors about shorter-term benefits from large investments in Gen.Ai by large cap US companies.
Investors have reminded themselves the prospect of lower interest rates (Fed cutting) is only immediately positive if economic growth and corporate profits hold up. If/when the Federal Reserve needs to loosen policy because the world’s largest engine is starting to cough and splutter, that becomes a negative and easily explains why commodities and small caps are yet again on the nose this month.
Investing in accordance with the cycle is a lot easier said than done, plus the market can be a very unreliable guide; it changes its mind in less than a heartbeat, leaving many to ponder ‘what ifs’ and look for answers after the damage is done.
