Stocks: Japan rate hike hits yen trade, US stock futures

Meanwhile, South Korea’s Kospi closed 9 percent lower after a trading halt earlier in the day.

Taiwan’s Taiex closed 8.4% lower in its worst day on record and Australia’s ASX 200 closed down 3.7%.

India’s Sensex was down 3.1 percent at 12:48 local time, while the Nifty 50 was down 3 percent.

“We haven’t seen a day of carnage like this, really, since the February, March 2020 COVID selloff,” IG Australia analyst Tony Sycamore told Bloomberg TV.

Hong Kong’s Hang Seng fell as much as 2.8 percent and China’s CSI 300 fell as much as 1.3 percent. Chinese stock markets were already under pressure this year due to the country’s economic woes.

In Europe, the regional Stoxx 600 fell 2.5 percent as trading opened on Monday.

Paris fell 2.4%, Frankfurt fell 2.6% and in London, the FTSE 100 fell more than 2%.

Investors are also on edge before US markets open later in the global day. S&P 500 futures were down 2.8% at 2:11 a.m. ET, while Dow Jones Industrial Average futures were down 1.6%. Nasdaq 100 futures fell 4.8%.

Bitcoin is down 14% in the last 24 hours.

The negativity in US stocks ahead of the week’s open came after a recent sell-off in tech stocks as euphoria over artificial intelligence wore off as investors wondered when they would see returns.

A lackluster July US jobs report contributed to investor discontent, sparking a sell-off in US stocks on Friday, just days after the Federal Reserve again held interest rates steady.

But not only the US economy and the Fed act on the markets. It’s also about Japan’s interest rate hike last Wednesday, which IG’s Sycamore told Bloomberg TV was “the straw that broke the camel’s back.”

The development of global transport trade

The Bank of Japan raised its interest rate from 0% to 0.1% to 0.25% on Wednesday – the highest level in 15 years.

The increase seems small, but it matters because the yen has been the focal point of the carry trade, where traders take advantage of a divergence in interest rates around the world. Because turnover in global currency markets is massive – hitting a record $7.5 trillion per day in April 2022, according to a triennial survey — the consequences can be huge.

Japan maintained ultra-low interest rates for decades after the implosion of an asset bubble in the 1990s contributed to persistent deflation. It continued to keep rates low after the pandemic, unlike other major central banks that started raising them.

That created a divergence in monetary policy that impacted the Japanese yen, which fell to a near four-decade low against the strong U.S. dollar last month.

This divergence has helped the carry trade, which, as ING analysts explained on Monday, has been a dominant successful investment strategy this year.

This involves “borrowing cheaply in yen – with the expectation that the yen will continue to fall – and investing in a high-yielding currency or asset, preferably backed by a strong macro argument,” ING analysts added.

However, that strategy is now hitting a snag as the BOJ’s interest rate hike last week sent the yen higher – it is 7.5% higher in the last five trading days and is 1.6% higher low against the dollar so far this year.

On Monday, the yen rose as much as 3.3 percent to 141.70 per dollar, a level last seen in January.

The BOJ’s interest rate hike further boosted risk-off sentiment in global equity markets.

“The yen shorting is undoubtedly contributing to the global risk-off environment,” ING analysts wrote in a separate July 25 note.

There are still choppy waters ahead, particularly for risk assets, Vishnu Varathan, Mizuho Bank’s chief economist for Asia excluding Japan, said on Friday.

“The dark clouds of the adverse feedback loop between carry liquidation and risk off contagion cannot be ignored,” he added.