Good morning friends
The markets are expected to open the week in the red
And we are here to try and make sense of what is actually happening
The trigger for this morning's market declines is changes in the Japanese economy affecting interest rates, indirectly causing investments to be withdrawn from risk assets
We will explain more in a moment, but what is important to understand is that this is a technical and almost forced sale
Now think about this for a moment
From the perspective of the US market, nothing has changed since Friday
What is happening here is that large Japanese investors are forced to sell risk assets in the United States
Think of it like an apartment being sold by a receiver at a price below market value
To better understand what is actually happening here, we need to explain what has happened in Japan until now
Years of zero interest rates in Japan made investing in the Japanese currency particularly unattractive, meaning buying bonds or deposits in Japan yielded almost no return. This led institutional investors in Japan to seek more attractive investments outside Japan, such as US bonds or risk stocks.
Now, with interest rates rising, investing in Japan is becoming attractive again, so large Japanese investors are selling assets in the United States and buying Japanese assets
But that's not all
For years, investors used to borrow Japanese yen at near-zero interest rates, convert it to dollars, and invest the dollars in higher-yielding assets, such as US stocks and bonds. The yield differential was their profit.
As yields in Japan rise, the cost of borrowing in yen increases, and the yen strengthens against the dollar as investors convert dollars back to yen to repay loans.
This situation, where the yen rises along with the cost of borrowing, causes a massive forced sale of US risk assets, because their dollar-denominated assets are worth less, and they are essentially "liquidated" automatically by Japanese investment firms that now demand larger collateral for the loans they took.
This is essentially what is happening now: the bank in Japan is forcing its clients to sell to secure the loans the clients took from it.
That's all
Have a great day