After one of its worst days in history, the Nikkei is now on course for the polar opposite. But even with the over 10% gains today, it is still down 11% thus far in August trading. That puts the rebound we’re seeing into perspective and how sentiment is still very much in a fragile spot.
The unwinding of the carry trade is arguably the key reason behind the selloff that has been happening since Friday. And when you see such exacerbated declines, margin calls are always a factor to consider. That especially when you see the price action yesterday. Someone or many someones were definitely getting stopped out and that creates a negative feedback loop of sorts.
The selling is leading to more losses and that results in even more selling in order to meet the margin calls. That explains the one-way selling yesterday and why investors were panicking in asking the Fed to help. Crybabies, am I right?
This is a market that just can’t stomach losses and will kick and scream at central banks when things don’t go their way, even just a little. I mean, even with yesterday’s drop, the Nikkei is still up over 20% since the start of 2023. And the S&P 500 and Nasdaq are still up ~9% and ~8% respectively just this year alone.
Is there really anything that bad to complain about?
Anyway, the unwinding of the carry trade and the margin calls associated will stop when they stop. A rebound so far today doesn’t mean it is over just yet. It’s all behind the scenes stuff and we’ll only get a better idea of who got squeezed once the dust settles.
This article was written by Justin Low at www.forexlive.com.
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