While it is always difficult to identify the cause of such events, consensus seems to be pinpointing an unwinding of the JPY carry trade as the main culprit (a major deleveraging event), with a side of increased US recession concerns.

A carry trade is borrowing cheap in one currency to invest somewhere you expect a higher return. With the cash rate in Japan close to zero, borrowing there to invest elsewhere has been cheap and caused the Yen to weaken substantially against major currencies as investors sold Yen to purchase foreign assets such as US equities. However, a rate rise in Japan followed by softer US data which will likely lead to rate cuts in the US has triggered a huge reversal, i.e. selling foreign assets to buy Yen and payback the loans. The weak Yen has boosted the Japanese equity market given large global exporters such as Toyota benefit from a weaker currency, so as the leveraged trades reversed the equity market sold off rapidly also.

Essentially yesterday was a large margin call on the Japanese equity and currency market which has reverberated around the world. Fortunately, our portfolios have no direct Japanese exposure, nor Asian equity funds and so the impact has been more muted with developed markets such as the US and Australia holding up much better.

Further adding to uncertainty, the rise in the US unemployment rate last Friday night triggered the so called SAHM rule. This “rule” indicates a recession has started when the three-month average of the US unemployment rate is 0.5% or more above its 12-month low. Markets reacted poorly to this, as recessions are a bad time to own equities. However, neither the Fed Chair Powell nor Claudia Sahm, who first quantified the relationship, think the US economy is in a recession. None of our macro indicators are currently pointing in that direction either.

Our Growth Barometer is relatively steady: