Yen Carry Trade Unwinding

For two days running, stocks across the world are bearing the brunt of a credit crack that first started in U.S. sub-prime market and now has spread to other credit instruments. This collateral damage has prompted hedge funds, PE funds, large financial institutions to pay back the capital that they have borrowed from Japan very cheaply. With the losses mounting on their mortgage books, they will now have to withdraw from risky assets like stocks and return the borrowed money and this is causing Yen to strenghten against the Dollar, now trading at 114.32 after touching a high of 113.55 against the Dollar. Serious downward stock price adjustments had happened in the last few days, dow jones has re-traced all the gains it had made during this fiscal year and all other emerging markets are also follwoing the suit. For the first time in the last four years, serious credit squeeze is happening and this is not good for assets like stocks. Only selective buying can be made in stocks which are having the strongest of fundamentals and business momentum. Commodities are also correcting and this is good news for commodity user industry and hence to some extent for Inflation.

Credit Cycle

We should ask ourselves one extremely important fundamental question i.e., whether Credit cycle that has fuelled spectacular price inflation across the asset class has cracking or not before we raise doubts about continuation of bull run in stocks, commodities, properties.
I say in some segments of U.S. subprime mortgage market, it is showing signs of troule with many borrowers defaulting on their credit liability, and hedge funds along with large investment banks who love to buy these certificates are facing problems. Thats adding volatility in currency and stock markets because they pull back money from other assets like stocks if they face turbulance in holdings of their other invesments like subprime mortgage certificates. Volatility is the name of the game for some time now.

Volatility In Stock Markets

For some days, stock markets across the world are facing volatility due to subprime mortgage problems in the U.S., yen carry trade un-winding because of strenghting of yen against the dollar, re-adjustment of risk due to sharp rise in the price of crude oil which is hovering above U.S.$75 mark for the past 2 weeks. Hedge funds which love to play the stock and currency markets with leveraged money are facing problems due to adverse movements in certain asset prices against their bet, this is also leading to volatility in the system.

Global Liquidity And Financial Markets

Every asset class one can imagine is going through a massive bull phase un-seen in the history of financial markets. Whether it be Stocks, Bonds, Commodities, Real Estate, Art, Mortgage market. Never before we had a secular bull run in all these asset classes at the same time.

Huge liquidity (money) unleashed by central banks across the world has been fuelling this asset price inflation for the past 4 years and its in the interest of wealth managers, portfolio managers, investment advisors, financial planners to continue advising wealthy individuals/corporates to keep pouring money in these assets in order to out-perform or out-do each other. These individual/corporates also desire to out-do each other and hence raising their risk appetite in order to achieve more returns and hence take more risks in the form of leveraged by-outs/take overs as shown by some large PE funds.
Also they leverage in financial markets across the world in order to gain large profits and hence open the window for disaster if someting goes wrong in terms of rise in interest rates, big fluctuation in cheap to borrow currencies like Yen, an epidemic spread likes of bird-flu across a continent like europe, major terriorism attack on developed countries, sharp increase in crude oil prices.
Any adverse event can thus poses great risk to investors/traders financial health.