The sharp sell-off that rattled the stock market this month might be a harbinger of what’s ahead, warns JPMorgan.
The bank’s analysts suggest that the market’s recent turmoil, driven by fears of slowing economic growth and a sudden unwinding of carry trades, could be a mere “dress rehearsal” for more turbulence down the road.
This month’s plunge was swift and brutal, marking the worst market loss in two years.
But just as quickly, the market regained its footing, buoyed by a series of positive economic updates.
This quick recovery has led many on Wall Street to dismiss the sell-off as an overreaction to a fleeting blip in the data.
Many market participants are dismissing the recent blowup of various crowded trades as a fluke or flash crash, but JPMorgan analysts see it as more of a dress rehearsal for what’s to come.
The sell-off was triggered by a spike in U.S. unemployment and was exacerbated by a 12.4% drop in Japan’s market—the biggest since the infamous “Black Monday” of 1987.
The culprit? An unexpected unwinding of the yen carry trade, which had been a favored strategy for investors borrowing yen at low rates in Japan.
As the Bank of Japan’s surprise rate hike caught investors off-guard, they scrambled to sell assets to meet margin calls, leading to a cascade of selling that rocked global equities.
While the carry trade might have sparked this month’s turmoil, JPMorgan’s analysts believe it won’t be the main cause of future volatility.
The carry trades could eventually become a problem again, but with investors getting burned, not everyone will be reinstating these trades, so it ought to be more difficult to hit the old highs.
Instead, they pointed to the re-emergence of growth risks as the likely trigger for the next wave of market instability.
The market may have weathered this storm, but according to JPMorgan, the skies ahead remain uncertain for businesses navigating these unpredictable waters.
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