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Unwinds of stretched positions, U.S. recession fears and policy uncertainty have sparked big market swings – exacerbated by thin trading activity. The BOJ’s sudden willingness to incorporate the yen as a factor in setting policy accelerated an unwind of carry trades that use the low-yielding yen to buy other assets. Speculators scrambling to close their short-yen positions drove one of the largest unwinds in yen futures on record in the past few weeks, according to CFTC data. Just how much of the carry trade has unwound is hard to quantify given the over-the-counter nature of many yen-funded positions. Yet the sharp closing of the gap between currency and rate spreads – see the chart – and rapid cutting of futures positions suggest a major unwind. Another position unwind – equity dispersion trades tied to index and single-stock volatility – magnified the stock slide.
Up until recently the BOJ had been deliberate in trying to normalize policy without jeopardizing Japan’s return of inflation. Then came its sudden rate hike in July and blurring of its policy framework, including the yen as a factor. The rise of a BOJ policy misstep prompted us to reconsider our positive view on Japan. Yet we felt the BOJ would be forced to walk back – and did. We think the BOJ will now proceed cautiously on policy, so we stay overweight Japanese stocks on a currency-unhedged basis. Further carry trade unwinding and yen strengthening is a risk. Yet we like the virtuous circle of inflation driving wage growth – and thus corporate pricing power and earnings. Corporate reforms aimed at adding shareholder value are also key.
While Japan bore the brunt of last week’s turbulence, U.S. recession fears sparked the latest slide after U.S. payrolls data for July showed an uptick in the unemployment rate. Yet the unemployment rate is still remarkably low by historical standards – and it’s rising because of a growing labor force tied to immigration, not because of job losses. Total U.S. payrolls have grown more than 1 million over the past six months, well above usual pre-recession levels. The latest jobless claims, ISM services data and Fed bank lending survey all paint the picture of an economy that is slowing, not approaching recession, in our view.
Stronger-than-expected U.S. corporate earnings, especially in tech, reaffirm our positive U.S. view. To date, Q2 earnings growth for tech versus non-tech sectors sits at 20% and 5%, respectively – up from expectations of 18% and 2% at the start of earnings season, according to LSEG Datastream data. While tech is leading the charge, non-tech sectors are poised to log their first earnings growth since late 2022, a sign strong earnings may be broadening out. Easing cost pressures and moderating inflation have benefited U.S. corporates. We stay overweight U.S. stocks and the artificial intelligence (AI) theme.
We could still see air pockets of volatility in thin summer trading conditions. Rather than dialing back risk, we lean into our highest-conviction ideas. We stay overweight Japanese and U.S. stocks, and favor the AI theme in the U.S.
Jean Boivin is Managing Director, Head of the BlackRock Investment Institute at BlackRock Inc.
Wei Li is Global Chief Investment Strategist, Blackrock Investment Institute at BlackRock Inc.
Devan Nathwani, Portfolio Strategist – BlackRock Investment Institute, and Carolina Martinez Arevalo, Portfolio Strategist – BlackRock Investment Institute, contributed to this article.
Disclaimer
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
© 2024 BlackRock Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. This article first appeared June 10, 2024, on the BlackRock website. Used with permission.
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