Did The Carry Trade Fuel Tech Momentum?
It's Playing Out In Real Time
Coming into the week, I said I wanted to see how well small-caps could hold on to recent gains and whether investors might revert back to the old habit of leaning into the magnificent 7. With regard to the latter, they didn’t and small-caps are still in firm control, beating large-caps by a wide margin again. Utilities are outperforming, the Nasdaq 100 had its worst day in nearly two years and the mag 7 stocks suddenly look like one of the market’s weakest groups. At this point, we’re nearly three weeks into this trend and it still isn’t showing signs of abating.
I don’t think it’s a coincidence that mega-cap tech is cratering just as the yen is rallying. I’ve talked repeatedly about the risk of the reverse yen carry trade and I think we’re seeing that play out in real time. Traders have used cheap yen as a funding source to add exposure to U.S. tech for a while. Now that the yen is rallying, those traders are getting caught on the wrong end of the trade and are being forced to unwind their positions. With the Fed looking at a pair of possible rate cuts later this year and the BoJ considering rate hikes, that interest rate differential is going to start closing and that will add more strength to the yen. This tech correction may not be over by a long shot.
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