Yen-led Black Monday: The end of Pax Americana?

According to market watchers, the Black Monday few days ago was sparked by a squeeze on carry trade, a similar arbitrage trading strategy used in the 1997 attack on Ringgit which Mahathir conveniently picked on George Soros. 

Reuters reported on Tuesday:  

The U.S. dollar was nursing steep losses on Tuesday, with the yen on the back foot after a sharp rise in the previous session as traders contend with unwinding of popular carry trades and the prospect of deep rate cuts from the Federal Reserve.

The yen was weaker on Tuesday at 144.47 per dollar, after rising for five straight sessions and touching a seven-month high of 141.675 on Monday. The yen was also lower against the Australian dollar, euro and sterling.

Last week's softer-than-expected U.S. jobs data, along with disappointing earnings from major tech firms and heightened concerns over the Chinese economy, have sparked a global sell-off in stocks and high-yielding currencies.

On Monday, the global rush out of riskier assets took a staggering turn, with equity markets in meltdown mode as worries that the U.S. is heading for a recession roiled investors.

The problem lies with Japan and US, but Reuters had to implicate China. The subtle Western media propaganda to demonise China noticeable.

Panic unwinding 

There was no mention of China in CNN Allison Morrow's Tuesday analysis meant to sooth the nervous market. She mentioned "The Bank of Japan took away the free money" for arbitrage. 

In addition, Allison argued the Friday job numbers were no big deal, AI stocks, which lead the market run, not an economic indicator, and defended the Fed. The same narrative as recession fear is overblown. 

However, US-led sanctions against China could reignite inflation and complicate any possible soft landing of the economy.     

Nevertheless, BOJ's late response to block the free money to arbitrage the wide interest rate differential between the Yen and US dollar is worthy of pondering. 

This blog had highlighted back in October 2023 and anticipated BOJ to nudge interest rate up. Repatriation of Japanese capital from the US was also emerging then.

True enough, CNBC reported possible shake-up of the US$35 trillion treasuries market by Japan, China and Fed five months ago. Merely three months ago, CNBC reported Yen hitting 34 year low and indicated a matter of time for BOJ to get aggressive.

The unwinding of the carry trade may well be over. CNN reported Japanese stocks recovered 10% on Tuesday after the steep 12% drop on Monday, worst since the Black Monday crash of 1987. 

And, Reuters reported Wall Street regained some lost ground on Tuesday. While, the two- and 10-year yield curve turned from negative to positive which is a leading indicator of an economy heading towards a downturn.

"We're getting a relief rally specifically because the yen depreciated a little bit overnight and that would remove the pressure for margin calls, so the selling pressure has abated, which provides an opportunity for the market to rise with some buyers coming to the table," said David Waddell, CEO and chief investment strategist at Waddell & Associates.

Pax Asiana or BRICS 

Unlike 1987 when G7 dictate the direction of the global economy and Wall Street was the leading market, it is interesting that Black Monday of 2024 was triggered by events in Japan.

Its build-up was from the Far East more than six months ago. And, Wall Street managed to regain composure from leads provided by Tokyo. 

Is it confirming the end of the global dominance of Pax Americana and beginning of the long awaited Pax Asiana? Throw China and Russia in the picture, it is perhaps the shift from unipolarity to multiparity with BRICS replacing the role of G7?     

Wall Street is expected to be listless for a short while as caution sets in and market takes a breather after the bloodbath. The massive fall this time is far worse than the crash of 1929 or Black Tuesday that became the precursor to the Great Depression and World War II. 

The recovery on Wall Street will not be any more than bargain hunting and not any aggressive buying. 

Ponder this. Confidence will not return with Warren Buffet loudly announcing having sold half his holdings in Apple and reiterated again he is switching to cash. 

Apparently he has been a net seller of equities since October 2022.

Personal finance author, Robert Kiyosaki may not have the best track record in predicting market crash, but George Soros former partner in Quantum Fund, Jim Roger is also going cash. 

He is predicting the  "next market sell-off will be worst in lifetime" and described "global good time nearing the end". Jim prefer sugar and rice over Bitcoin.  

The likelihood attention will shift to markets in Asia for leads on the direction of global equities, in which the economies remained resilient.

Bold buy call

As of the Malaysian stock market, FBM KLCI regained 35.91 points on Tuesday after two days of sell-down and cautiously creeping up further on Wednesday. 

Foreign buyers were seen Tuesday and Wednesday. The cautious trader could interpret as falsely propping the market for a latter sell-off.  

Yet local stockbrokers were boldly calling for a buy at a time buying the market was described in Tokyo as 'catching a falling knife'. Edge reported fund manger saying it is now time to buy. 

BIMB Securities were equally gung-ho to issue a buy call. Same buy call from Apex and Malacca Securities.  

Its too recent to expect market's wtching hour to be over. Less exuberant tone in Bhupinder Singh's "Selling tsunami roils market" in Tuesday's Star Online:  

“A big rate cut by the Fed, combined with positive messaging about a soft landing and substantial stimulus by China, has the potential to reverse sour sentiment in the markets by boosting investor confidence, stimulating economic activity, and stabilising global growth expectations.

“However, the success of these measures will depend on their execution and the broader economic environment, with risks such as inflation concerns and debt sustainability needing to be carefully managed,” said Kevin Khaw, senior research analyst at iFAST Capital. 

China economic leadership

Bhupinder further stressed: 

He said China’s property factors are still dragging the economy while slowing worldwide demand has worsened the situation further.

“The valuation of Chinese stocks are also extremely cheap at this juncture. Having said that, we think it might take some time for the positive sentiment to reflect in Chinese equities, although we are relatively more positive on Chinese equities compared to one year ago,” he said.

That said he noted Asia stands to benefit from the global fund reshuffle, which will bolster market depth as investors seek higher yields amid easing monetary conditions.

The region’s relative attractiveness is further enhanced by recent market exuberance in developed markets, particularly the United States, which has seen volatility spike recently given that the AI-related stocks are priced to perfection.

“While the prospect of a global monetary policy easing is a positive catalyst, we recognise that Asia could take a cue to loosen up policy tone over time but is unlikely to command an aggressive rate-cutting cycle tracking the developed market, as currency stability is more of a priority in the region,” he said.

Ringgit has certainly been doing well lately vis-a-vis US dollar and other currencies. In fact, it is the current out performer in the region. Its long overdue had it not held back by sentiment, artificial demand and exporters defering conversion of proceeds. 

This should not deny Anwar the bragging rights. The prospect of a stronger ringgit vis-à-vis US dollar could attract genuine inflow of foreign funds and naturally stimulate the local market. 

Interesting to watch China inching up the podium of global economic leadership. While, US continue to be beseiged by its long standing twin deficits and its debt refinancing increasingly challenging. 

And, European Zone heading for the inevitable collapse as anchor Germany slide further into economic malaise without access to cheap Russian energy resources. 

Political will from EU power centre in Brussels to arrest the economic decline of member states blatantly lacking. NATO is determined for a confrontation against Russia at behest of Washington.