JPMorgan states that the process of eliminating the carry trade, which has impacted stocks in recent days, is not yet complete.
It is estimated that the adjustment is only halfway through, as Japan appears poised to continue increasing interest rates.
On Tuesday, the markets experienced a slight recovery after the sell-off, although concerns about the state of the U.S. economy persist.
The dismantling of the carry trade, which has contributed to the slump in U.S. stocks in recent days, is probably not over yet, according to a JPMorgan strategist.
Arindam Sandilya, co-head of global FX strategy at the bank, emphasized the recent decline in global stocks, with the main U.S. stock indices dropping over the last three trading days.
Market analysts explain that this is partly due to an unexpected 15 basis point rise in interest rates in Japan, which led some investors to unwind a trade that had been popular in recent years. In this trade, investors borrowed cheap yen and invested the money in higher-yielding assets elsewhere, such as U.S. stocks. As the yen strengthened and borrowing costs rose, investors using the carry trade faced margin calls, triggering a wave of global selling.
However, Sandilya said that the unwinding of the carry trade is probably only halfway through and that investors hoping for a quick recovery could be disappointed.
“We believe that the unwinding of carry trade operations, at least within the speculative investor community, is 50% to 60% complete,” Sandilya said in an interview with Bloomberg on Tuesday. “So we are not finished, not by a long shot.”
Sandilya anticipates that the Bank of Japan will continue to gradually increase interest rates, given that borrowing costs in the country are “nowhere near” being aligned with its real economy.
The country’s authorities are monitoring inflation risks, according to the minutes of the latest central bank meeting, which suggest that further policy tightening is on the horizon.
Meanwhile, citing technical studies conducted by JPMorgan, Sandilya noted that investors’ portfolios do not tend to recover quickly after suffering technical damage due to a significant movement, as the markets have demonstrated in recent trading days.
“It is not common for V-shaped reversals to occur that return to the starting point of the movements. At best, one could expect a stabilization of the markets around current levels, maybe a shallow recovery,” he said, adding that JPMorgan remains in a “defensive mindset.”
U.S. stocks rose slightly on Tuesday as traders tried to recoup some of their losses from Monday’s session, which marked the worst day for stocks in two years.
By: Nestor Castillo, ForAllTechNews Director