by Ivan Martchev
August 13, 2024
We rebounded exactly where I said (last week) we were supposed to rebound from, when it comes to the NASDAQ 100 Index’s 200-day moving average. The NASDAQ 100 was up last week, and the S&P 500 was also marginally up. There is no sign of the persistent rotation out of tech into value that persisted in July. This can still happen later, but first we must determine if the yen carry trade is done unwinding.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I heard a few commentators put the percentage of the unwinding of the Yen carry trade at 50% to 75%. If that is true, that would be good news. The trouble is I don’t believe anyone knows for sure unless they are high up in the Bank of Japan or some other money center bank that facilitates a large Yen bank borrowing, so unless those pundits are part of such organizations, I would take their statements with a grain of salt.
One unfortunate result of borrowing Yen in large amounts by foreign financial intermediaries is the resulting Yen short squeeze. Because of that short squeeze, the correlation between the Yen and the NASDAQ 100 and S&P 500 has increased dramatically, as well as the correlation between the NASDAQ 100 and Tokyo’s Nikkei 225. Of course, correlation is not causation, and the cash trading in the Nikkei 225 runs from 8pm Eastern Time until 2am the next day, when there is only trading in S&P 500 and NASDAQ 100 futures. When there is cash trading in the U.S., the S&P 500 drives the correlation. Before that, Europe, most importantly the DAX index, is trading, which affects the S&P 500 futures and Nikkei futures.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When you view the close correlations here, keep in mind that the main driver of the S&P 500 futures (purple), the Nikkei is trading 8pm to 2am. The rest of the time, the drivers are reversed, so to speak.
Before the Yen carry trade began to unwind, the correlation between the Nikkei 225 and the S&P 500 was not as evident in the 8pm to 2am time frame as it is now. The chart below is the S&P 500 Index futures (purple) and the Japanese Yen, which sees cash trading for 24 hours a day, unlike the Nikkei 225 Index.
Since the decline in the S&P 500 Index began in July, the index diverged notably for only about 24-hours from the Yen. That was the night and early morning before the FOMC press conference on Wednesday, July 31, when the divergence ended, and then some on the next day. This divergence is clearly visible on the chart below where the space between the S&P 500 futures (purple) and the Yen is the widest.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Yen was weak on Thursday night and then strengthened as Friday went on. (When the Yen points down, it means it is strengthening as it costs less Yen to buy one dollar). On Friday we have the beginning of another Yen-SPX divergence. The S&P 500 Index rallied, albeit in somewhat messy fashion. The point is that so far there were only 24 hours when the Yen and the S&P 500 went in opposite directions.
If the Yen is up on Monday – and I have no way of knowing that, as I write on Sunday – the odds are that U.S. stocks will be down. When we see the correlation between the S&P 500 and the Yen get much weaker than what we see at present, that would be a good sign that the unwinding of the Yen carry trade is nearing completion. Before then, as Yogi Berra said, “it ain’t over till it’s over.”
Volatility Index for the Nikkei 225 Index
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Bank of Japan tried to rein in the Yen by having its Governor state that he won’t raise interest rates in the middle of “this kind of volatility.” The above chart is the daily closing value of the equivalent of the S&P 500 VIX index for the Nikkei 225 Index. The daily closing value almost made it to 72, but it reached 90 intra-day (the day our VIX went to 65). The Nikkei has behaved equivalently to the way it behaved in the COVID crash of March 2020, without there being COVID this time.
Such spikes in volatility, both in the U.S. and Japan, often mark longer-term bottoms. That’s the good news. The bad news is that such large selloffs, more often than not, tend to cause those climactic lows to be retested, and there is no way to guarantee that the retest will hold. I hope the retest will hold, but I don’t know that for sure – and neither does anybody else.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In the meantime, we have room for a rebound in U.S. stocks, despite a deteriorating geopolitical situation. So far, Iran hasn’t attacked Israel in retaliation for the assassination of a Hamas leader in Tehran, but Ukraine has attacked Russian territory, seizing a major natural gas hub. They also blew up a gas rig in the Black Sea used for military reconnaissance by the Russians.
While I am hopeful that Iran would refrain from any strikes on Israel, I am not hopeful about the Ukrainian situation, particularly as the Paris Olympics are now over. I expect the war in Ukraine to kick into high gear shortly. How much it moves the markets remains to be seen, but European natural gas futures are already spiking as investors are unsure how the fighting affects the flow of Russian natural gas into the European market, which will likely be substantial despite the detonated Nord-Stream pipelines.
TTF gas futures for European delivery moved from 30 to 40 euro per megawatt hour quickly. While that may not look like a large move compared to what happened at the onset of the war, it is a 33% spike in a short period of time. TTF gas futures can go a lot higher if the fighting on Russian territory continues.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Look to Japan for the Cause of the Latest Volatility
Income Mail by Bryan Perry
A Rotation into Corporate Debt is Underway
Growth Mail by Gary Alexander
The Perma-Bears are Roaring Again
Global Mail by Ivan Martchev
A Dramatic Increase in Yen Correlations
Sector Spotlight by Jason Bodner
August is Market Extinction Month
View Full Archive
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Ivan Martchev
INVESTMENT STRATEGIST
Ivan Martchev is an investment strategist with Navellier. Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev
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