(Bloomberg) — The global stock market rally began to lose momentum once again as the yen strengthened, reigniting concerns about the unwinding of carry trades. This comes after a tentative recovery fueled by the resilience shown in the US labor market.
European stocks saw modest gains at the conclusion of a volatile week marked by historic spikes in volatility. US equity futures retreated after the S&P 500 recorded its strongest daily gain since November 2022. Despite this, the benchmark is still heading towards its fourth consecutive weekly decline. Treasury yields dipped, and the dollar index also saw a decline.
The resurgence of the yen poses a threat to the revival of risk appetite, particularly following a more positive US jobless claims report that helped quell fears of a recession triggered by disappointing employment data from the previous week. The upcoming US data releases, particularly on consumer inflation and retail sales, will be crucial in providing reassurance to investors looking for signs of a soft landing.
UBS Global Wealth Management’s Chief Investment Officer, Mark Haefele, warned that market volatility could persist for an extended period. He noted that further unwinding of carry trades could lead to increased selling of risk assets, given the prevailing economic uncertainties.
According to Bob Savage, Head of Markets Strategy at BNY Mellon Capital Markets, there is still room for the unwinding of carry trades, with short-yen positions likely to be reduced as the Japanese currency continues to strengthen. He believes that investors are overly bearish on the yen and anticipates that it could appreciate towards 100 per dollar in the future.
In Japan, the Topix index saw its gains narrow from an initial 2% to 0.9% as the yen strengthened against the dollar. A stronger yen has the downside of diminishing Japan’s export competitiveness and thereby affecting the country’s stock market negatively.
Elsewhere, Chinese equities flattened out after an initial uptick, with indications emerging that the better-than-expected inflation data was influenced by seasonal factors rather than underlying economic strength.
Mixed messages from US Federal Reserve officials also contributed to caution among investors. Federal Reserve Bank of Kansas City President Jeffrey Schmid’s comments, indicating hesitancy towards interest rate cuts due to inflation levels above target, added to the uncertainty in the markets.
The global repricing following these statements has been so drastic that at one point, interest-rate swaps implied a 60% chance of an emergency rate cut by the Fed before its scheduled meeting in September, although current pricing suggests around 40 basis points of cuts for that month.
Oil prices stabilized after a previous rally, against the backdrop of escalating tensions in the Middle East, while gold prices experienced a decline.
Key events in the upcoming week include crucial US economic data releases that will likely influence market sentiments and investor decisions.
–With contributions from Richard Henderson.
(c) 2024 Bloomberg L.P.
Vocabulary List:
- Momentum /məˈmɛn.təm/ (noun): The strength or force gained by motion or by a series of events.
- Resilience /rɪˈzɪl.jəns/ (noun): The capacity to recover quickly from difficulties; toughness.
- Volatility /ˌvɒl.əˈtɪl.ɪ.ti/ (noun): The quality of being prone to rapid and unpredictable change.
- Appetite /ˈæp.ɪ.taɪt/ (noun): A strong desire or inclination to do something.
- Reassurance /ˌriː.əˈʃʊə.rəns/ (noun): The action of removing someone’s doubts or fears.
- Pristine /prɪsˈtiːn/ (adjective): In its original condition; unspoiled or immaculate.
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