Mexico City.- August 5 left an indelible mark on traders and investors after the boards of all the world’s stock exchanges turned red. We explain what were the factors that triggered this Black Monday in the markets.
Last Friday, August 2, the market was attentive to the data on job creation in the United States, which slowed down and turned out to be below expectations.
The U.S. Labor Department reported the creation of 114,000 jobs in July after a downwardly revised increase of 179,000 in June. The market had forecast a payrolls increase of 175,000.
Moreover, the unemployment rate stood at 4.3 percent in July, its highest level since October 2021. With this, the market realized that the US economy was slowing down, fueling concerns about an economic recession.
In the last week of July, Bank of America (BofA) had already warned about the loss of dominance of big technology (and the detonation of a bubble inflated by artificial intelligence) if investors noticed signs of a slowdown in the US economy.
“Recent data suggests the global economy is ‘sick,’ and that ‘we are one negative payrolls release away’ from big tech stocks losing their dominance,” noted research led by Michael Hartnett, chief investment strategist at BofA.
On Monday, August 8, the big tech companies lost around a trillion dollars in market capitalization. The acclaimed group of the “magnificent seven” is made up of Apple, Amazon, Meta, Nvidia, Microsoft, Alphabet and Tesla.
The Japanese yen has drawn attention from investors following efforts by financial authorities in Japan to boost the value of the currency after it fell to a 38-year low against the dollar.
The Bank of Japan had to step in by injecting trillions of yen into its financial system to shore up the value of its currency. It also announced a surprise interest rate hike to 0.25 percent last week, along with a plan to halve its monthly bond purchases over the next two years.
This monetary tightening after years of negative interest rates, combined with a slowdown in economic activity in the United States, precipitated the rise of the yen, which was also supported by the interventions of the Japanese central bank in the foreign exchange market.
This has lifted the yen from a low of 162 per dollar, not seen since 1986, to 144 per U.S. dollar, close to its high of 140.88 for the year. The yen is now up more than 11 percent against the dollar from its lowest level in nearly four decades.
This strengthening of the yen triggered a massive liquidation of carry trade operations (impacting the Mexican peso), which contributed to the fall of global markets.
The carry trade is a speculative investment strategy whereby one borrows in one part of the world and invests in another part, taking advantage of the interest rate differential and the imbalance in the foreign exchange market. It seeks to generate high returns with little capital invested.
“The yen’s rapid move is putting downward pressure on Japanese equities, but it is also triggering the unwinding of a major carry trade: investors had leveraged themselves by taking out yen-denominated debt to buy other assets, mainly US technology stocks,” said Kyle Rodda, chief financial markets analyst at Capital.com in Melbourne.
The first impacts of this collective risk aversion were felt by the stock markets in Asia following the monetary tightening of the Bank of Japan and the rise of the yen.
Stock indexes in Taiwan and Seoul fell more than 8 percent on the day on Monday, while the Nikkei – Japan’s main stock market indicator – sank 12.4 percent, its biggest daily drop since October 1987.
European stock markets also ended Monday with sharp declines. Paris lost 1.42 percent, London 2.04 percent, Frankfurt 1.82 percent, Madrid 2.34 percent and Milan 2.27 percent.
Dragged down by the stock market storm of the Asian and European sessions, the main indices on Wall Street fell at the opening on Monday, with losses in mega-cap technology stocks standing out.
All Dow Jones stocks were trading in the red, while shares of tech giants such as Alphabet, Netflix and Meta lost between 2.5 percent and 4 percent.
The peso extended its losses on Monday as investors unloaded their carry trade positions in the national currency amid pessimistic sentiment about an economic recession and lower risk exposure.
At the opening, the peso reached a maximum of 20.2181 units per dollar in the international currency market, a level not seen since the end of September 2022, while in banking operations, the dollar opened with a rebound of 53 cents, to 20.13 pesos at Citibanamex windows.
The end of the super peso seems to have been left in the past, as the national currency has accumulated a depreciation of around 15 percent so far this year.
The peso has been under heavy pressure since federal elections were held on June 2 and the proposal for a constitutional reform of the judicial system was revived.
The sudden appreciation of funding currencies (such as the Japanese yen) has damaged the carry trade strategy, which typically involves traders borrowing at lower rates to invest in higher-yielding assets, often in the emerging world (such as Mexico) but also in developed markets such as Australia.
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