Name: How an Investing Strategy in Japan Spurred a Global Market Rout
Uploaded: 2024-08-05T23:39:00Z
Duration: 2 min 33 s
Description: The Dow, Nasdaq and S&P 500 all fell by over 2% on Aug. 5 as part of a worldwide selloff in stocks. Here’s how an investing strategy based on the Japanese yen contributed to the global rout.

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The Dow, Nasdaq and S&P 500 all fell by over 2% on Aug. 5 as part of a worldwide selloff in stocks. Here’s how an investing strategy based on the Japanese yen contributed to the global rout. Photo: Noriko Hayashi/Bloomberg News

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The Dow, Nasdaq and S&P 500 all fell by over 2% on Aug. 5 as part of a worldwide selloff in stocks. Here’s how an investing strategy based on the Japanese yen contributed to the global rout.

How an Investing Strategy in Japan Spurred a Global Market Rout

Narrator: Here's what we know about the market turmoil in the US and around the world. It started with this 12 plus percent drop in Japan's Nikkei Index spurred by the unwinding of an investment strategy called the carry trade.

Well, in a carry trade investors, they're borrowing currency of a country with a really low yielding government debt like Japan. They're selling that currency and buying in this case, dollars with it. With those dollars, they could invest in stocks, they could invest in ultrasafe assets like US treasuries, but the aim is to profit from this difference in interest rates between the two countries.

Narrator: But on July 31st, the Bank of Japan raised rates to 0.25% sparking a rally in the yen that caught hedge funds off guard.

One thing that's happening is hedge funds in the US are having to cut their risk on this trade that's gone really bad for them. What that means is they're selling things that they may be not even wanting to sell, but they need to satisfy their risk models, and that's adding to the speed at which we're seeing some prices fall.

Narrator: And just a few days before economic data out of the US had put investors on edge.

We had a Fed meeting on Wednesday and then a jobs report on Friday. At the Fed meeting, Wednesday, the Central Bank held interest rates steady and said that they might be ready to start cutting in September as they've seen the job market slow down a little bit and inflation also looks like it's coming under control. Then on Friday we had this jobs report come out that was a lot worse than pretty much anyone in the market was expecting. It showed the unemployment rate going up to a three year high. It did show job growth, but it was much lower than what everyone was expecting.

Narrator: These three events fueled a broader market selloff that has included the biggest tech stocks shutting more than $650 billion in market value in one day.

We're seeing some US hedge funds cut risk across their portfolios that can lead to forced selling and selling a lot of the same things as each other, and that's contributing to the big declines today.

Narrator: Behind these moves are questions about the health of the US economy.

That was because investors kind of expected this soft landing narrative to take hold that the Fed had tamed inflation, was going to be able to cut interest rates, and we were not going to go into a recession. This jobs report that came out on Friday sort of challenged that a bit and is making people question the health of the economy and whether the Fed really pulled this off like people had previously priced in.

Some days the high-speed news cycle can bring more questions than answers. WSJ’s news explainers break down the day's biggest stories into bite-size pieces to help you make sense of the news.

How an Investing Strategy in Japan Spurred a Global Market Rout

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