AFMC - Weekly Commentary: In A Jumble
2024-07-27 04:30:24 ET
Summary
- The unwind of highly levered yen carry trades is driving de-leveraging at the periphery.
- De-risking/deleveraging has taken hold in the semiconductors and big tech stocks following a historic speculative melt-up.
- Nvidia is now down 16.2% over 12 sessions, with the SOX sinking 13.6%.
- Two-year Treasury yields dropped 13 bps this week to 4.38%, the low since February 2nd.
"Bubbles go to unimaginable extremes, and then double (quadruple for this cycle)." "Call a Bubble's demise at your own peril." Maxims notwithstanding, has history's greatest Bubble reached a critical juncture? Only time will tell, of course. But I'll tell you, today's environment looks about as I would expect the craziest of endgames to play out.
The unwind of highly levered yen "carry trades" is driving de-leveraging at the "periphery." Elsewhere, de-risking/deleveraging has taken hold in the semiconductors and big tech stocks - one of history's biggest and baddest "crowded trades" - following a historic speculative melt-up. Meanwhile, a destabilizing short squeeze ensures long/short strategies and the few surviving bears remain on their heels, while a chaotic rotation unleashes frantic performance-chasing speculation.
July 25 - Bloomberg (Ruth Carson and Winnie Hsu): "The yen's stunning revival is upending global markets, dragging the yuan higher and hammering assets from Japanese stocks to gold and Bitcoin as investors reassess their leveraged bets. The yen rose to its strongest mark in more than two months Thursday, reflecting burgeoning wagers that the interest rate gap between Japan and the US will likely narrow… It lifted the yuan to the highest in over a month, while battering the likes of the Australian dollar as carry trades fall out of favor. Gold and bitcoin also fell amid signs that traders were unwinding previously popular wagers to embrace the yen. 'It's effectively a big deleveraging event caused by the short squeeze in the yen,' said Kyle Rodda, a senior market analyst at Capital.Com. 'It's forcing widespread liquidation across markets.'"
July 26 - Bloomberg (John Parry): "The short squeeze in the Japanese yen is fueling broad-based liquidation of global carry trades, leaving spot emerging market foreign exchange returns in deeply negative territory over the past month, writes Damian Sassower, chief emerging markets credit strategist with Bloomberg Intelligence."
July 24 - Bloomberg (Masaki Kondo): "The yen rallied through key levels against the greenback on Wednesday, leading an unwind in global carry trades that pushed down currencies ranging from the Mexican peso to the Australian and New Zealand dollars… 'This week has seen more pronounced unwinding of carry trades, underscoring the concentration of short JPY (Japanese yen) positioning that is now facing more intense pressure from MOF (Finance Ministry) intervention to support JPY,' said Richard Franulovich, head of foreign exchange strategy at Westpac Banking. 'Local politicians have become more vocal around the economic dangers from unfettered JPY weakness.'"
Over the past 12 sessions (beginning July 11th), the yen has surged 5.2% versus the dollar. The Japanese currency has clobbered EM currencies. The Brazilian real is down 9.0% versus the yen in 12 sessions, the Chilean peso 9.0%, the Mexican peso 8.1%, the Colombian peso 6.2%, the Argentine peso 6.0%, the South African rand 5.7%, the Taiwanese dollar 5.6%, the Indonesian rupiah 5.2%, the Turkish lira 5.2%, the Indian rupee 5.1%, and the Philippine peso 4.9%....
Weekly Commentary: In A Jumble