Stock market chaos sparked by yen last month could resume as rates rise in Japan, SocGen says

• Turmoil over the resumption of yen trading could continue again, according to SocGen.

• Analysts pointed to Japan’s central bank, which appears poised to continue raising interest rates.

• A further rebound in yen trading could hurt enthusiasm for US tech stocks, SocGen said.

According to Societe Generale, the stock market’s chaotic resumption of yen trading that fueled its worst sell-off in two years in August may not be over.

The European Bank highlighted the likelihood that Japan’s central bank will continue to raise interest rates, a development that rattled markets in early August.

Investors panicked after Japan’s central bank issued a surprise interest rate hike in late July. The move sparked a resurgence in yen carry, a popular strategy in which investors borrowed money at ultra-low rates in Japan to use in other assets such as U.S. stocks.

The effects of this sell-off have faded, with the major US indexes recovering more than the losses of the past month. But more turbulence could be coming as rates in Japan look poised to “normalize” after decades of deflation, according to SocGen global strategist Albert Edwards.

Japan’s economy is also showing promising signs that another rate hike is in order. Wage growth in Japan just outpaced U.S. wage growth for the first time in more than two decades, Edwards noted.

“We have always urged our readers to keep a close eye on Japan as it has consistently been a precursor to major market moves,” Edwards said in a note to clients on Tuesday. “Any normalization of Japanese interest rates would have a major impact on the market – not just in the short term (by unwinding the yen trade), but also in the long term as higher Japanese interest rates would reduce export investment flows,” he added. late. added.

Some investors have already taken advantage of this opportunity, with a significant number of investors closing their short yen positions in recent months. Net open interest rose in August, according to SocGen data, indicating that most investors are no longer shorting the Japanese currency.

Meanwhile, the U.S. economic outlook looks uncertain, Edwards said, which could weigh on U.S. stocks. He pointed to weakness in the U.S. labor market over the past year and waning optimism about earnings in the technology sector, which has accounted for most of the S&P 500’s returns in recent years.

“Could Yen Trade Still Have Legs? We will have to keep a close eye on the other side of the yen trade, where a decline in the tech price may also relax the trade. We are closely watching the decline in US tech EPS optimism. Edwards added.

The story continues

Edwards has been calling for a recession and a stock market crash in the U.S. for months, even as many economists say the economy remains broadly on solid footing. GDP beat expectations for the second quarter, while inflation continued to cool. Meanwhile, hiring remains positive, with the unemployment rate rising but remaining near multi-decade lows in July.

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