The memory of the dark “Black Monday” that markets experienced on August 5 has faded in recent weeks, but the threat is not going away, as became clear on Tuesday. On August 5, following weak US jobs data released the previous Friday that triggered recession fears, the Japanese stock market (the Nikkei index) fell 12.4%, its biggest drop since 1987, infecting the rest of the world. Since then, the major stock indices have recovered, with some returning to their all-time highs. However, as JP Morgan strategists wrote in advance: “We’re not out of the woods yet”. Something that was confirmed a few hours later: weak but unsurprising American industrial data (ISM manufacturing) revived fears and the correction reached Wall Street (the S&P 500 lost 2% and the technology Nasdaq lost 3%), extending this morning to the Asian stock markets (the Japanese Nikkei corrected more than 4%). Faced with possible new storm waves and with the intention of seeing this danger arrive, advises Albert Edwards, seasoned analyst at Société Générale, Nothing better than to look specifically towards Japan… and its salaries. But let’s take it step by step.
“We have always recommended our readers to follow developments in Japan closely, as they have always been precursors to major market movements (for example, the tech bubble of the late 90s began to deflate in Japan). Until Japan imploded. to trade “In early August, investors showed very little interest in Japan. That has changed,” Edwards says in his latest market commentary, in which he highlights how the lack of concern seen in recovered stock markets contrasts with what is being seen in currency and government debt markets, which have not strayed far from the extremes of the August 5 crisis.
“It only took weak US economic data in early August to cause market turbulence, rekindling fears of a hard landing in the US. This, combined with a rise in Japanese interest rates, sent the famous to trade of the yen (borrow cheaply in yen and buy speculative or higher-yielding assets outside Japan), explains the Company’s strategist.
The fund manager who sounded the alarm on Japan’s interest rate hikes (which he called “finance’s St. Andrew’s Fault”) sees another shock coming. Arif Husain, head of fixed income at T. Rowe Price, is now warning that investors “have just seen the first shift in that fault line, and there’s more” market volatility ahead after the country’s July interest rate hike helped trigger a sudden shift in interest rates. trend in the to trade of the yen.
The aforementioned rise in interest rates in Japan in the face of a resurgence of inflation after years of deflation and negative rates has led to a sharp rise in the yen (broadened when it crossed against the dollar after the US employment data) that has taken by surprise many large funds, which in recent years had devoted themselves to financing themselves in yen (cheaper) to invest in other assets, mainly in Western stock markets and, more specifically, in large US technology stocks, those known as the “magnificent seven” ‘, Juan José Fernández-Figares, analyst at Link Securities.
“This operation of to trade had become very popular among the big hedge fundswho, seeing the reaction of the Japanese yen after the actions of the Bank of Japan (BoJ), were afraid and They started to unwind their positions and buy back yen. to forced marches to meet their debts in this currency. All this led to the collapse of many assets, especially the European and American stock markets, a collapse that was accelerated by the sharp fall of the Japanese Nikkei,” adds Fernández-Figares.
“The yen was borrowed and then sold by investors to finance various risky investments at very low cost. Once the yen began to rise in response to slowing global growth and rising interest rates in Japan, the structure collapsed as traders shorted the yen. faced margin calls. The S&P 500 fell, as did semiconductors. In addition, excess returns on U.S. high-yield bonds disappeared, while packages “The Germans have bounced back,” says Mathieu Savary, chief European strategist at BCA Research.
Edwards says there is no doubt that much of the turbulence in the stock markets in early August can be attributed to extreme positioning and now-dissipated optimism. But he cautions against ignoring two fundamental shifts. First, optimism about U.S. tech earnings is collapsing, undermining the main driver of the U.S. bull market. Second, and perhaps the most important question for investors todayhe emphasizes, is Is Japan Coming Back into the Macroeconomic Mainstream?.
Recent optimism that Japan is finally emerging from deflation has led the BoJ to take tentative steps to normalize interest rates, just as the Federal Reserve (and other central banks) are preparing to cut them. This week, Japanese Governor Kazuo Ueda presented a paper to a government panel suggesting that the central bank will continue to raise interest rates if the economy and prices behave as the central bank expects.
“Any normalization of Japanese interest rates would have a significant impact on the market, and not just in the short term (by canceling the to trade of the yen), but also in the longer term, since Higher Japanese interest rates would slow export investment flows. I remember that before the Japanese bubble burst, 10-year bond spreads were only 75 basis points over the US (in September 1990), instead of the current 300 basis points. The convergence of yields would have a profound effect on the investment outlook,” Edwards says.
Will there be more convergence? To answer this question, the Society’s analyst brings out an indicator that speaks for itself. Japan has experienced a Wage settlements reach 33-year high with the latest wage negotiations (the annual round of negotiations in the spring is known as the ShuntoThe general wage increase of 5.58% was well above 3.99% in May, not exceeding 5% since 1991.
The graph comparing this indicator – if we remove bonuses and overtime – with the US Employment Cost Index (ECI) shows A surprise This hasn’t happened since the early 90s.the Japanese line exceeding that of the United States. A perforation that would be much more pronounced if general salaries had been included in the drawing (i.e. including overtime and additional pay), which amount to 8% over a year.
“While in the West policymakers have tried to contain wage inflation, in Japan the opposite is true, where rising wages are seen as essential to escape the deflationary quagmire. The same is true of the weakness of the yen, a side effect of super-inflation, low interest rates and massive quantitative easing (QE). But the problem is that fundamental weakness in the yen often turns into speculative weakness. to trade of the yen and is therefore likely to explode spectacularly if economic conditions (or winds) were to change,” Edwards continues.
The strategist recalls how in 2008 the impact of the disorderly liquidation of operations of to trade in yen on asset classes that had previously “benefited” from it. “I discussed this topic with our currency guru, Kit Juckes, and we came to the conclusion that Nobody knows if the to trade The yen has already been completely eliminated. Certainly, to the extent that US tech stocks/the “magnificent seven” benefited, their strong rebound would have stopped any change in trend. Which brings us back to the recession fears that triggered the market turbulence in early August,” he adds.
The U.S. nonfarm payrolls figures for August, released Friday, may allay or rekindle recession fears, but other labor market data support the recession story, Edwards said, noting that, curiously, Japan also saw a surprising jump in unemployment in July (from 2.5% to 2.7%). “All of this brings me to I wonder if the Japanese authorities were not too hasty. by raising rates, especially as core CPI appears to be falling to just 1%. Could it to trade Yen continues to appreciate? The other side of the border will have to be closely monitored. to trade of the yen, where a drop in technology prices can also cancel the deal. “We are closely monitoring the decline in profits of US technology companies,” he concludes.
Rising to the challenge, Savary of BCA Research cites analysts at JP Morgan, who estimate that 75% of to trade in yen have been dismantled and he wonders if this means the market turbulence is behind us. “We doubt it. Even though the rally in risky assets and yields may last a few more weeks, the collapse of operations to trade This is just a prelude to other problems coming. The global economy is heading inexorably toward a recession that will depress European earnings and force the European Central Bank to cut rates more aggressively next year than the yield curve predicts,” he said in a report urging investors to ignore rising interest rates. European stocks and German yields.
Savary’s thesis is as follows: the operations of to trade affect global economic activity because Allocate global savings to stimulate growth. The coins of to trade These are typically countries like Japan or Switzerland, which have low growth rates, low interest rates and current account surpluses. The latter is crucial, the economist points out. According to the savings investment identity, a current account surplus reflects an excess of national savings over national investments; in other words, excess savings.
With the money they borrow through the sale of the funding currency, investors buy high-yielding assets or currencies with high growth prospects, which must be financed with foreign liquidity. As a result, the operations of to trade They move their savings from places where they are not used to finance the activity, and then invest them where they can generate growth. “Once the operations of to trade collapse, funds leave the countries and assets where they finance economic activity and return to their point of origin, where they remain inactive. As a result, liquidity conditions tighten where growth is generated, which harms global economic activity“concludes the expert.
