Help. The earth around Tokyo trembles, struck at dawn by a tsunami of a strength never seen before. Back off, actually Japanese stock market sinks, the third largest on the planet, a market that often makes history in itself. This time too it seemed that, under the direction of governor Kazuo Ueda, Japanese finance had found the right formula to engage with other markets without trauma.
Alas, never was hope more vain. Not only are Japanese shares taking the downward path but, unlike other times, the violent decline anticipated a dramatic, apparently unstoppable trend which affected the main indices one after the other, with the tech ones suffering in particular . From the Nasdaq even -5% at the start of the session. to the S&P 500 -4,3% starting.
A surprise? Not so much: among the insiders, the strategist wrote months ago Alessandro Fugnoli, the closure of positions financed in yen has been at the forefront for some time. “Over the years – he wrote – Japanese operators, who at home have seen increasingly negative real bond yields, have begun to convert (and only partially hedge) their yen into dollars (to buy American shares, Treasuries and gold) and in euros (especially to buy French government bonds). The growth of the American stock market and the excellent yields of Treasuries and stability have led them to maintain their positions over time. In recent times, the idea is that America is slowing down and that the long-awaited cycle of lower rates is really about to begin, reducing the yield differential compared to Japanese bonds and making it gradually less convenient to stay on Treasuries".
Fugnoli, is this explanation enough? Apparently not. Can Japan unleash a storm of this size?
“Of course, if the phenomenon does not remain limited to the Land of the Rising Sun but the excesses are accentuated as happened with the movement of securities linked to Artificial Intelligence. A phenomenon comparable to that of the technological ones in 1999. These movements are then accompanied by a growing use of derivatives".
And now? How long will it take to absorb the excess?
“It's difficult, almost impossible to say. At least for now. No one can predict the behavior of Japanese investors or how long it will take for them to close out their positions under fire today. What we know is that the shutdown began last Friday and is destabilizing many financial assets. We also know that there is close coordination between the American and Japanese Treasury on this issue."
Will the Fed's parachute avoid the worst?
“The ISM non-manufacturing index, for the month of July, improved to 51,40 from 48,8, better than the estimated 51 points, thanks to the increase in orders and employment... This latest data dispels the fears that have emerged over the weekend of a sharp recession... In this regard, the president of the Chicago Federal Reserve, Austan Goolsbee, said that last Friday's employment data in the United States, although weaker than expected, do not suggest a recession, but that Fed officials must be aware of changes in the economic environment to avoid being too restrictive with interest rates.
“I don't think Powell intends to act with particular energy, the president of the Chicago Federal Reserve, Austan Goolsbee, said that last Friday's US employment data, although weaker than expected, do not suggest a recession . Also because the decline in rates has already begun."
No one will stop the avalanche, in short.
“We say it is unwise to rely on stock markets in such turbulent times marked by the closure of Japanese yen-financed positions, talk of an American slowdown and doubts about the profitability of AI. The US slowdown, however, is yet to be demonstrated and from the Magnificent Seven we can rotate into many other interesting sectors. A summer correction of 10 percent is part of the physiology of the market and can occur without the need for triggers: in short, the picture remains positive, but there is a lower degree of conviction, there are doubts and there is confusion".
“Operators, moreover, can count on the excellent situation of the bond markets, as long as they are of good quality. A rate cut is increasingly likely, 25 basis points in September. It is unlikely that more will be done. The economy is doing well, says Alan Blinder in the Wall Street Journal, and the job market, although less tight than a year ago, remains solid. In short, we don't see why rushing to cut when keeping things as they are for a few more weeks could allow inflation to complete its descent."
Unless the samurai's cry convinces the Fed to do more. Difficult.
