The turmoil in global markets could persist for months, a Wall Street bank has cautioned, due to efforts to unwind heavily squeezed “carry trades.”
Analysts at Bank of New York Mellon (BNY) indicated that major investors may endure further difficulties as the Japanese yen is expected to strengthen even more.
This week, stocks have experienced significant volatility amid fears of a US recession and pressure on major investors due to the yen’s recent surge.
The yen appreciated after the Bank of Japan unexpectedly raised interest rates for only the second time in 17 years last week.
This rate hike squeezed margins on carry trades involving the yen, forcing investors, including hedge funds, to sell stocks quickly to meet their risk requirements.
Earlier this week, JP Morgan noted that the unwinding of these carry trades was only about three-quarters complete.
Bob Savage, head of markets strategy and insights at BNY, commented: “Expect the pain for yen shorts to persist for weeks if not months.
“Further risk reductions are likely, and August will continue to be a highly volatile month.”
