Deflation Shock
Given recent events in financial markets, this is an update to explain recent events. The market has had a deflation fright but without a major event such as a default. That means bond yields (black) and inflation expectations (red) have fallen. Their combined value (blue) has cooled from 7.9% to 5.2% in recent weeks.
The System Is Cooling
At the epicentre of this is the Yen. I have spent much time covering the Yen and the carry trade. Essentially, investors have been borrowing cheap Yen, due to its low interest rate, and investing the proceeds elsewhere. You could assume that the destinations of those proceeds are feeling the pain as there are margin calls for yen loans to be repaid. The Yen is surging, and those loans are now more expensive to repay, forcing liquidations.
Sterling versus Yen
It is remarkable this carry trade has been going on for so long, much to our frustration. Yen strength has caused the Nikkei to fall 25% in short order, making Japanese equities the lowest compared to the world since the 1970s.
Nikkei Down 25%
Other casualties have been technology stocks, bank stocks, and the Mexican Peso.
The US dollar is also down, which is surprising, as in recent market events, it has tended to act as a safe haven. Government bonds have risen along with the Yen and the Swiss Franc. The Chinese Renminbi has also gained.
However, I would note that European bond spreads have also widened, as it costs more to borrow in France than in Germany. Gold and silver have acted as safe havens, but Bitcoin has not. It tested $50,000 earlier today following a 20% fall but has rebounded somewhat. The rumour is that a major investor has a large position funded in Yen. Also, in crypto, altcoins are weak, with ETH making a 3-year low in BTC.
Some recent sales have proved useful, such as Pershing Square (PSH) -23%, and the European banks ETF (CB5) -10% since Tuesday. The latter has come under stress as French OATs now yield 0.8% more than German bunds.
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