Posted on 08/05/24
| News Source: WSJ
The unwinding of some of Wall Street’s most popular trades intensified Monday, sending Japanese stocks to their worst day since the 1987 market crash and walloping U.S. technology shares.
U.S. stock indexes opened sharply lower, tracing declines in international markets, before recovering somewhat after a survey of purchasing managers showed the services sector expanded last month at a slightly higher rate than expected.
The tech-heavy Nasdaq led the way, falling nearly 4% in afternoon trading. Every industry segment in the S&P 500 declined, pushing the broad index more than 3% lower. All 30 stocks in the Dow Jones Industrial Average declined and the blue-chip index shed more than 1000 points.
The Russell 2000 index of small stocks, resurgent in recent weeks, lost more than 3%. Oil and precious metals also fell. Bitcoin dropped 10%.
The rout began in Asia, where Japan’s Nikkei 225 tumbled 12% amid a surging yen. It was the worst single-day percentage drop for the Nikkei since Oct. 20, 1987. That was the Tuesday after Black Monday in the U.S., when the Dow industrials fell nearly 23%.
The selloff in Tokyo extended last week’s rout that followed the Bank of Japan’s decision to raise interest rates. That move pushed the yen higher relative to other currencies. Disappointing economic data in the U.S. stoked the selloff, unwinding a popular Wall Street bet known as the carry trade.
For years, investors around the world bought riskier assets, such as U.S. stocks, and funded the trades with the yen, thanks to ultralow interest rates in Japan. Until recently, many hedge funds and money managers expected rates to remain low and the yen weak.
Instead, the strengthening yen has squeezed the carry trade. Investors who borrowed yen to fund their bets have been forced to buy more of the currency by bankers insisting on additional collateral. That is pushing the yen even higher, prompting more margin calls.