Despite the Federal Reserve’s readiness to ease monetary policy, last week’s 4.3% decline in the S&P 500 has left market veteran Ed Yardeni perplexed. He believes another factor is at play: the unwinding of the carry trade.
The carry trade, which involves borrowing cheaply in Japanese yen and investing in higher-yielding assets like US tech stocks, has been a popular strategy in recent years. However, when Japan tightens rates, as it did in August, the trade buckles, forcing traders to sell assets to cover margin calls.
Yardeni points to hawkish interest rate comments from Bank of Japan Governor Kazuo Ueda as a contributing factor to the recent sell-off. Ueda confirmed that interest rates will continue to rise in Japan if the economy and prices remain in line with the bank’s expectations.
The unwinding of the carry trade, combined with the reaction to the jobs report, has led to a passing growth scare, Yardeni says. He believes the employment report wasn’t as bad as widely believed and that productivity growth may continue to surprise to the upside.
JPMorgan has also warned investors that the unwinding of the carry trade is only half done, suggesting that further market volatility may be on the horizon.
