The Japanese market dropped over 10% overnight over the collapse of the carry trade – basically for decades, traders and hedge funds would borrow cheaper in Yen (lower interest rates), deploy in USD (higher interest rates) and leverage their trades for maximum gain. As long as interest rates moved in the same direction in both countries it worked for the most part. However, last week the Japanese central bank raised interest rates – strengthening the Yen, but even as the Feds sat put, treasury yields crashed from around 4.25 to 3.75 in a short period, the biggest fall from 4.10 to 3.75 occurred in 3-4 days.
US Futures are down over 2%, continuing the sell off from Friday.
I don’t believe anyone in our group trades or trades on margin. However, I do want to reinforce some things we spoke about in the past two weeks.
Not catching a falling knife. I had spoken about this last week and how the Doom Loop from algo traders could continue, the same principle goes for carry traders, and plenty will be shaken out today but we can’t predict when this will stop completely. The VIX (Volatility or Fear gauge) has risen to 52.
Continue playing defense – In the past month, since I sold some 15-20%, the vast majority of recommendations have been holds and only buy on dips, so defense remains key.
We’ll take a further look towards the end of the day.