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the global market changes suddenly!

this afternoon, the japanese stock market suddenly plunged, and the japanese topix index fell rapidly by more than 1%. at the same time, the decline of the korean stock market also increased in the afternoon, and the indian stock index nifty index and sensex index both fell by 1%. the main contract of the european futures line of the container shipping index, which indicates external demand, also plummeted by more than 10%. it is worth mentioning that the us dollar against the japanese yen also showed a significant plunge. so, what happened?

the bank of japan may raise interest rates faster than many currently expect and should work to better communicate those moves to ensure markets don’t panic, a former japanese official said today. subsequently, the yen appreciated further and markets began to worry about whether the yen carry reversal of early august was back.

it is worth noting that recent data shows that new carry trades have resumed, with leveraged hedge funds increasing their short positions in yen futures. at the same time, the dollar is depreciating and the yen is appreciating. this will undoubtedly increase market volatility. another data that is more sensitive to the yen carry trade is sofr, which has also shown signs of rising recently.

diving is coming

this afternoon, the usd/jpy suddenly plunged, and the decline quickly exceeded 0.5%. the yen exchange rate was only one step away from the level of august 5. on that day, the yen rose by 1.62%, triggering a sharp drop in global equity markets.

as the yen strengthened again, the japanese stock market also began to plunge. the nikkei 225 index, which was still strong in the morning, began to plunge rapidly in the afternoon, and the topix index fell rapidly to more than 1%. following the japanese stock market, the korean stock index also plunged.

the main reason for this volatility may be the latest statement from toru watanabe, a former bank of japan official and one of japan's top anti-inflation experts. watanabe reportedly said today that the bank of japan may raise interest rates faster than many people currently expect, and the bank of japan should work to better communicate these potential moves to ensure that the market does not panic. "the pace of rate hikes may be faster than everyone expects." he said. "it is absolutely possible that the bank of japan will raise interest rates twice this year."

in addition, on tuesday, bank of japan governor kazuo ueda submitted a document to the japanese government stating that the bank of japan will continue to raise interest rates if japan's economic and price performance meets the central bank's expectations.

on the other hand, the market may also be reflecting the us non-farm data for august. gain capital believes that a better-than-expected employment report will consolidate the prospect of a "soft landing" and a 25 basis point rate cut in september, which will be positive for the us dollar. the step-by-step pace of rate cuts may be what the fed wants to see most. on the contrary, data that is significantly worse than expected may stimulate recession expectations and the probability of a 50 basis point rate cut, which will be negative for the us dollar and us stocks. as of now, the market expects that the us will add 164,000 jobs in august, compared with 114,000 in the previous month, the unemployment rate will drop from 4.3% to 4.2%, and the hourly wage growth rate will rise from 3.6% to 3.7%.

carry trade disturbed again?

so, with the appreciation of the yen, will the carry trade disturb the market again and produce a black swan like the one on august 5? judging from the current data, this possibility is not small.

"the unwinding of carry trades does pose a serious threat to the optimistic view of risk assets going forward," said steve barrow, head of g-10 strategy at standard bank. decades of investment in overseas assets recycled from japan's trade and current account surpluses could "reverse" as japanese interest rates and the yen appreciate, the strategist wrote in a report thursday. the bank of japan, not the fed, may be the "most important central bank," and the "tragedy" caused by the yen surge and stock market crash in august may be a "harbinger of things to come." while the fed's moderate and steady rate cuts could be good for riskier assets, the fed's benefits could be completely offset if the bank of japan's rate hikes lead to a large unwinding of carry trades.

tom nakamura, currency strategist and co-head of fixed income at agf investments, said it is not often that foreign exchange developments have a broader impact on u.s. stocks, and one has to go back to the 1997 asian financial crisis to find a relevant comparison. further unwinding of the yen carry trade remains a very large cross-market risk, and investors are somewhat concerned about the bank of japan's actions over the next year or two.

even as the bank of japan has signaled that the next rate hike could come in october, the yen carry trade remains large, active and appears to be increasing. recent data shows that new carry trades have restarted, with leveraged hedge funds increasing their short positions in yen futures.

sofr, another indicator for observing the reversal of the yen carry trade, has also shown signs of rising recently.

arif hussain, head of fixed income at t. rowe price, recently warned that investors are "seeing the first shift in this fault line, and there is more volatility ahead" after japan's july rate hike triggered a sharp reversal of the yen carry trade. the bank of japan's hawkish stance and concerns about slowing us economic growth sparked a frenzy of demand for the yen on august 5, but investors may have overlooked the deeper roots of the downturn in global stock, currency and bond markets. with interest rates rising in the world's fourth-largest economy, there is a risk that a large amount of japanese money invested overseas will be shipped back home. "to the extent that japanese bond yields rise, it may attract the country's large life insurance and pension investors to switch from other high-quality government bonds to japanese government bonds." arif hussain warned about yen rates long before the august plunge.

nakamura believes that 140 is the key level for the yen against the dollar. a gradual appreciation of the yen to the 130-135 range should be manageable. but if this happens in the next month or two, it means trouble.