Jim Bianco of Bianco Research has pointed to the Bank of Japan’s unexpected interest rate hike as the primary catalyst for a significant global market downturn in the beginning of the week.
What Happened: According to Bianco, the central bank’s decision to raise rates to 0.25% on July 31 has led to a massive unwinding of the yen carry trade, causing ripple effects across international markets.
“The surprise Bank of Japan hike led to one of the biggest unwinds of the yen carry trade,” Bianco stated, highlighting the severity of the market reaction.
He noted that in just three trading days following the rate hike, the Japanese stock market crashed by 20%, “even bigger than the three worst three-day moves during the October 1987 crash.”
Bianco’s analysis suggests that the Bank of Japan’s move was largely unanticipated, with only 29% of respondents in a Bloomberg poll expecting the rate increase.
This element of surprise, coupled with the size of Japan’s economic influence, has amplified the market reaction.
“The Bank of Japan’s balance sheet is larger than the country’s GDP, at 127.5% of GDP. By comparison, the Fed’s balance sheet is 25% of GDP. If you think the Fed matters to markets, the Bank of Japan has a 5x larger influence on their economy,” he said.
The fallout has extended beyond Japan’s borders, affecting global markets.
“The dollar has lost 5% of its value against the yen over the last three trading days, again going back to the July 31 Bank of Japan meeting. Why? Global yen carry trades are being unwound in a big way,” he said.
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Why It Matters: The mass sell-off was not limited to the broader financial markets.
On Monday, the cryptocurrency market experienced over $1 billion in liquidations, affecting nearly 280,000 traders’ positions.
Bitcoin, the market’s leading cryptocurrency, dropped by almost 19%, while Ethereum ETH/USD faced a more severe loss, falling by nearly 25%.
Corroborating Bianco’s analysis, a report from Bernstein drew parallels to previous market reactions, noting, “We had seen a similar Bitcoin BTC/USD reaction in the March 2020 crash.”
Bernstein’s analysis suggests that the crypto market downturn is a result of broader market fears rather than crypto-specific issues.
“We don’t see any incremental negatives for crypto here. Bitcoin’s institutional adoption trends – ETF inflows and wirehouse/bank approvals remain on track,” the report stated.
The Bernstein report also highlighted the potential for recovery, particularly in the context of a possible U.S. recession.
“If rate cuts and monetary liquidity is the usual template response to U.S. recession fears, we expect ‘hard assets’ such as Bitcoin (Digital Gold) to reprice up,” the report stated.
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