Global Stock Market Meltdown Has More To Do With Macro Funds Stuck In 'Wrong Way Around A Trade,' Says Expert

The recent global equity market meltdown is not primarily due to a shift in the U.S. economic outlook, but rather a result of investors winding down carry trades.

What Happened: The sell-off was sparked by weaker-than-expected U.S. jobs data, causing Japan’s Nikkei index to experience its largest one-day rout since the 1987 Black Monday selloff. However, analysts believe the jobs report alone wasn’t weak enough to be the primary driver of such significant market movements, Reuters reported on Tuesday.

Analysts attribute the market turbulence to a sharp position unwind of carry trades, where investors have borrowed money from low-interest economies like Japan or Switzerland to fund investments in higher-yielding assets elsewhere.

“In our assessment a lot of this (market sell-off) has been down to position capitulation as a number of macro funds have been caught the wrong way around on a trade, and stops have been triggered, initially starting with FX and the Japanese yen,” said Mark Dowding, chief investment officer at BlueBay Asset Management.

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By 1423 GMT on Monday, the tech-heavy U.S. Nasdaq stock index was down over 8% so far in August, compared to 6% for the broader S&P index. Analysts suspect that crowded positions in U.S. tech stocks, funded by carry trades, explain why they are suffering the most.

Why It Matters: The market is entering a bear phase, characterized by a prolonged period of falling stock prices. This is different from a recession, which is a significant decline in economic activity.

Experts have warned of a potential serious collapse due to the unwinding of yen carry trades. Zhe Shen, head of diversifying strategies at TIFF Investment Management, expects the sell-off to continue for a few more days as these trades are usually large.

As hedge funds typically fund their bets through borrowing, their adjustments are exacerbating market moves. Analysts added there was room for further short-term pain as positions are unwound, but the market shake-up would be limited.

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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari