As mentioned above, carry trades involve borrowing in the currency of a low-interest rate country such as Japan, and then investing the money in another currency with a higher return. The main theme of the yen carry trade is "sell yen" and "buy US big tech stocks", that is, investors convert yen loans into US dollars and then buy popular technology stocks such as Nvidia and Microsoft. So far this year, the correlation between the yen and US stocks, especially the semiconductor stock index (SOX), has even exceeded the correlation between the yen and the Japanese stock market (TOPIX). Therefore, the Japanese interest rate hike this time has led to a three-day decline in the Japanese stock market, a sharp rise in the yen, and a rapid unwinding of yen carry trades. Concerns about a US recession and the extremely high valuations of technology stocks have contributed to the sharp drop in global risk assets on Monday.

The person who tied the bell must untie it. The last thing the Bank of Japan wants to see is being regarded as the "initiator" of the global financial crisis. On the morning of August 7, Shinichi Uchida, deputy governor of the Bank of Japan, sent a strong dovish signal, promising not to raise interest rates when the market is unstable. As soon as this was said, the yen quickly fell below the 147 mark, and the intraday decline widened to 2%. The Japanese stock market also rebounded immediately. From the perspective of carry trade, the temporary absence of a rate hike on the yen means that the risk of forced liquidation on the liability side is reduced, while the easing of concerns about a US recession means that the asset side will not fall sharply. In the short term, the pressure to liquidate carry trades and the panic in the market will be greatly reduced.

After this incident, the Bank of Japan will be more cautious about raising interest rates, and the turmoil caused by the yen exchange rate has eased, but the structural trend in the medium and long term has not changed. In the future, the Bank of Japan and the Federal Reserve will continue to move forward according to their respective monetary policies: the Bank of Japan may raise interest rates at the right time, while the Federal Reserve may look for opportunities to cut interest rates. Therefore, the general trend of yen appreciation and dollar depreciation will not change. At present, only about 50% to 60% of carry trades have been liquidated. As the Fed's interest rate cut approaches, the interest rate gap between the United States and Japan narrows, and the funds used to do yen carry trades will still gradually close out of US dollar assets. Interest rate hikes and cuts are just appearances. As for whether future carry liquidations will cause similar stock market turmoil, it depends on whether economic data will cause huge fluctuations in exchange rates again. At present, most people overestimated the severity of the crisis at the beginning of the incident. This is more like a "wolf cry" drama. The nature of the incident has been downgraded from the initial recession risk aversion to yen carry liquidation caused by short-term exchange rate turmoil, with the sole purpose of killing valuations and clearing leverage on a large scale.

This is because we see that although the US stock market saw a trillion-level sell-off on Monday, it was not without follow-up. On the contrary, hedge funds are buying at the bottom. Goldman Sachs' report pointed out that hedge funds began to sell off large technology stocks in July. This is because they have made a lot of money by betting on technology stocks before, and the current high valuation has prompted them to lock in profits. It is also out of concern about the market weakness and the uncertainty risks of the election after the interest rate cut. However, last week, hedge funds have reversed their previous net selling status and turned to buying, and the buying speed has hit a new high since March. Most fund managers have different views from the mainstream market. They realized earlier that the current problems are more emotional and short-term. Although the Sam rule and interest rate inversion indicate that there may be a recession in the next six months, the current US economy and corporate performance have not changed substantially. Hedge funds regard this sell-off as a rare buying opportunity. The US stock market has the characteristics of long bull and short bear. "Buy small when it falls slightly, buy big when it falls sharply" is still an effective strategy: since 1980, every time the S&P 500 falls by more than 5%, the average return within 3 months has reached 6%.

The market is being repaired, and the speed is faster than expected, but it cannot be done overnight. The main forces that maintain the orderly operation of the US stock market are hedge funds using gamma strategies (i.e. selling when the market is rising and buying when the market is falling, thus creating low volatility) and CTAs that conduct option trend trading (i.e. buying when the market is rising and selling when the market is falling, reducing positions when the volatility is large, and increasing leverage when the volatility is small). The current market's gamma shield is still -2 billion, and the volatility is still at a high level of around 30. It will be considered stable only if it returns to the 1-digit level. The recovery of the shield and the bottom-fishing buying of CTAs will take time to recover. In the past few days, only the top hedge funds have rushed in. They know that the bigger the wind and waves, the more expensive the fish, and the risks they take are not small. The valuation of US stocks needs to be really killed, and more economic data is needed to give the market confidence, so that the market can really understand that the economy is only weakening but not in recession, so that sentiment can return.

The risk is that this round of decline may only be a prelude to economic recession. This local liquidity shock did not eventually develop into a global financial crisis, so it is hard to say that it is a pure good thing. The strong PMI index on Monday night partially dispelled the market's concerns about recession. VIX began to fall sharply one and a half hours before the data came out. The Fed did not come forward to appease the assets during the sharp decline, allowing the interest rate hike to ferment and affect global stock markets. This restrained attitude may indicate that unless the financial market completely collapses and threatens the US economy, we are unlikely to see early rescue measures. The repeated jumps in US economic data, the implicit statements of the Japanese and US central banks, and the escalation of geopolitical situations have all laid the groundwork for the sudden outbreak of economic recession at some point in the future. The recession will explode the gold coins of the US stock market, but now only the gold coins for yen arbitrage will explode. The hedge funds and CTAs (the group of people who buy options and vol to follow the trend) of the US stock market have fled very early. Since the US stock market has failed to price in the potential recession risk at this time, the real crisis should not be a drop of only 10 to 20 points.

The market is shifting from macro cycles to micro cycles. In the past, we paid attention to when the Fed would start cutting interest rates, and interpreted poor employment data and lower economic growth as positive, because these data could be used as reasons for the Fed to cut interest rates. Now, no one is questioning whether there will be a rate cut in September. Instead, they are beginning to worry that too bad fundamentals will affect the profitability and valuation expansion of American companies. Once there is a slight disturbance in factors such as rising unemployment, corporate profit margins, credit spreads, and exchange rate risks, it is easy to stir up a thousand waves and cause a comprehensive panic. Before the arrival of a definite rate cut and balance sheet expansion, the main line of the market will be liquidity fragility and money shortage: market funds will run to buy the Nasdaq, and the Russell will fall; Japanese yen loans face the risk of forced liquidation, so they need to sell US stocks to add margin; if the risk is high, they will seek gold and US bonds for safe havens, and at worst, they will give priority to covering up big technology stocks. Looking back at the rise of Bitcoin in July, the real money came from the spillover of risk asset funds after the rate cut anchored, coupled with the attention caused by Trump's campaign, this rise finally ended with Trump's appearance at the Bitcoin Conference. Currently, Trump's support in swing states is being eroded by Harris, and the market's risk appetite is at a low point in the micro cycle. Bitcoin price = total amount of money in the market * Bitcoin penetration rate. Now that both are falling at the same time, it is unrealistic for Bitcoin to regain the favor of funds. The best case scenario is volatility. The wisest approach is to keep the principal and wait for a clear easing cycle to come and the rise of assets on the denominator side. #日元加息 #美国大选比特币价格预测