analysis
‘Buying the dip has become a dangerous sport’ as nervous global share markets dive
Global financial markets are nervous.
We know this because Wall Street’s fear index, the VIX, surged 12 per cent overnight to 26 points.
It’s generally been trading under 20 following its previous spike around so-called Liberation Day in April, when US President Donald Trump rattled global markets with his “reciprocal tariffs”.
Markets are nervous because more than $US2 trillion ($3.1 trillion) was wiped off Wall Street last night in a matter of hours.
Where did the money go? Some went to Japan.
Indeed, enough money took flight for some to ask whether the multi-trillion-dollar US tech bubble has now popped.
Wave of selling
Just yesterday, US tech darling Nvidia announced an impressive set of third-quarter earnings.
Its revenue of $US57 billion ($88 billion) beat expectations and lifted the gloom around stretched valuations on markets as investors look past concerns about AI spending.
Its share price shot up about 5 per cent at the open of Wall Street trade, but then the metaphorical music stopped, and sellers swooped into the market.
Nvidia’s decline in the market sparked a broader sell-off.
It’s unclear what triggered the initial wave of selling.
ABC News has spoken to a number of analysts who speak of “profit taking”.
There are fears neither the Federal Reserve nor the Reserve Bank will offer up any more interest rate cuts, with stretched valuations for the so-called Magnificent Seven tech stocks on Wall Street.
“There are a lot of cross currents in asset markets currently, exasperated by approaching year end and risk reduction after a generally positive year,” Jamieson Coote Bonds co-founder, Charlie Jamieson, said.
“The volatility of equity and crypto assets are reminding investors that markets are not a one-way bet.”
Indeed, Bitcoin moved further into bear market territory overnight, plunging a further 5 per cent to under $US88,000 ($136,000) — down roughly 28 per cent from its all-time high.
IG market analyst Tony Sycamore recently questioned whether Bitcoin was the “canary in the coal mine” for overall sentiment in global financial markets.
Mr Jamieson leans towards a number of forces coming together to produce an anxious market environment.
“Isolating the cause is difficult,” Mr Jamieson said.
“Is it narrow risk leadership around AI? Is it macro-economic concerns or less central bank support as rate cuts look delayed?
“Is it funding pressures in US markets or concerns about sustainability of Japan or some European debt bubbles?
“It’s likely all of the above,” he concluded.
Japan is becoming a magnet for money
Mr Jamieson’s bond trading desk in Sydney is firmly fixated on the Japanese bond market.
Specifically, the so-called carry trade.
In very simple terms, extremely low Japanese interest rates, for decades, have encouraged global investors to borrow yen, and invest that money in higher-yielding markets.
Those low interest rates have also encouraged the Japanese to park much of their considerable savings offshore in the hope of getting a decent return.
The bull market on Wall Street — post the global financial crisis and interrupted by the COVID-19 emergency — has provided a sound destination for that money.
US Treasury bonds have also been viewed by those holding cheaply borrowed yen as an attractive place to earn a return of anywhere between 3 and 4 per cent.
Indeed, there’s almost $US1.1 trillion ($1.7 trillion) invested by Japan alone in the US bond market.
“The Japanese yields are now at levels where Japanese investors prefer bringing their money back to Japan,” Swissquote Bank senior analyst Ipek Ozkardeskaya recently wrote.
Japanese stimulus comes at crucial moment
Overnight, the 10-year Japanese government bond yield hit its highest point since the onset of the global financial crisis in 2008, ahead of Japanese Prime Minister, Sanae Takaichi’s, first budget announcement.
A budget of largesse would require sizeable Japanese government bond auctions to fund the spending.
Today her cabinet approved a 21.3 trillion yen ($US135.40 billion) economic stimulus package.
It’s largest fiscal stimulus from the Japanese government since the COVID pandemic.
The package will be funded by an expected rise in overall tax revenue reflecting inflation, as well as an additional issuance of government bonds.
Crucially, for financial markets, the size of additional government bond issuance has still to be finalised, but is expected to be larger than the 6.69 trillion yen ($US42.5 billion) issued for last year’s stimulus, according to Reuters reports.
This may be why the market reaction, so far, has been muted.
But analysts expect investment returns from Japanese assets to keep rising.
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These investments then become more attractive to say, for example, Wall Street traders who are concerned about the US stock market heading south or Japanese investors currently holding investments in US Treasury bonds.
“The 10-year Japanese government bond yield surpassed levels where borrowing yen and placing it in US Treasuries makes no money after taking FX hedging costs into account,” Ms Ozkardeskaya said.
“As a result, the Japanese pension funds are reportedly pulling $1.1 trillion out of the US Treasuries right now — meaning that one of the biggest Treasury buyers is turning into a net seller.
“In plain English, the [Japanese] may be pulling the rug from under the US Treasury market — that also affects riskier investments like tech, EM stocks and crypto.
“So maybe we will simply blame the Japanese if the Bank of Japan [BoJ] dares hiking rates come December … and that Santa remains stuck somewhere where there’s still snow this Xmas,” she wrote.
Iceberg ahead
Of course, it’s unclear where global financial markets will head from here.
If there is a prolonged share market wipe-out, millions of Australians in and approaching retirement will become increasingly concerned about their nest eggs.
There’s more than $4 trillion in Australian super, and a sizeable chunk is riding on the recent success of Wall Street.
We also know the Reserve Bank has had one eye out for a financial markets “meltdown” as RBA governor Michele Bullock recently put it.
A meltdown would give the central bank a compelling reason to consider resuming interest rate cuts.
“All of a sudden, there are risks, whilst market positions are still very heavily skewed toward pro-risk outcomes,” Mr Jamieson said.
The usually sanguine stockbroking veteran Marcus Padley is sitting a little more upright at his desk today.
“US markets still falling in after-market trade (hmmm…)… feeling a little precipitous,” Mr Padley wrote to his newsletter Marcus Today subscribers.
“Buying the dip has become a dangerous sport.
“Nothing to do today but sit in cash.”
