GuoJun Macro: All POPULAR TRADEs are UNWINDing

Last week was a super central bank week, with the Federal Reserve and the Bank of Japan taking turns, which was exciting enough. However, the stock market saw consecutive plunges, causing investors to start doubting their previous directions.

The Bank of Japan unexpectedly raised interest rates by 15 basis points. Although it caught the market off guard, the Bank of Japan's tightening direction is certain, so the rate hike itself is not surprising. Just as the People's Bank of China has been continuously lowering interest rates in the past few weeks, the monetary policy actions are in response to the economy and inflation. From this perspective, Powell's remarks after last week's interest rate meeting also basically indicated the Federal Reserve's basic attitude of "rate cut direction is certain, but the magnitude and timing are uncertain." Therefore, whether to raise or cut interest rates is just a result of gradual change.

What really made the market nervous was the continuous appreciation of the Japanese yen. After the Bank of Japan raised interest rates, the yen against the US dollar broke through the important level of 150. From a technical perspective, the yen exchange rate has also broken free from the long-term depreciation channel. In terms of the exchange rate itself, the yen's appreciation is somewhat abnormal because even with Japan raising interest rates, the interest rate differential between the yen and the dollar remains huge. Therefore, behind the yen's appreciation, there must be other forces at play. The more easily accepted view in the market is a significant retreat in yen carry trade.

Specifically, as one of the currencies with the lowest global interest rates, the yen has always been an important borrowing currency. Borrowing low-interest yen to purchase higher-yielding non-yen assets is an ideal trade. Now with the yen appreciating significantly, investors who borrowed yen face the potential for significant losses. Because when repaying the yen loan, although the interest rate on the yen borrowed is still low, the gains on non-yen assets may not be able to offset the huge losses from the exchange rate. From this perspective, the greater the appreciation of the yen, the greater the selling pressure on non-yen assets.

The sharp decline in US stocks led by the technology sector largely indicates a significant unwinding of carry trades. Of course, many investors believe that their own trading structures are unrelated to carry trades. However, in terms of the operation of financial markets, recent trading activities have actually shown large-scale reverse operations of previously popular trades. Therefore, even if investors may not have directly participated in carry trades, they are indeed influenced by carry trades to some extent, and often accelerate the unwinding of these trading positions.

When financial markets experience such turmoil, many people will consider the combination of financial markets and the real economy. Especially after the weak US employment data announced last week, investors began to worry about a possible recession in the US economy. The Sam Rule we mentioned earlier once again became a curse in the market. According to this rule, when the three-month moving average of the US unemployment rate rises by 0.5 percentage points or more from the low point of the past 12 months, it usually signals that the US has entered the early stage of an economic recession. Unfortunately, the latest US unemployment rate unexpectedly rose to 4.3%, triggering the Sam Rule once again and sparking a new round of recession tradesThe Sam Rule was born in the era of globalization over the past 30 years. Today, the US economy has probably undergone several structural changes compared to the past, especially in terms of inflation. In this sense, whether the US economy is heading into a recession still needs more data confirmation. While the market may loudly call for rate cuts, the fact remains that the major stock markets have seen considerable gains so far this year. Moreover, the recent decline in the US stock market has been mainly driven by technology stocks, while the performance of other sectors remains relatively stable. Therefore, there are still many variables as to whether there will be a rate cut in September, especially whether the rate cut will reach 50 basis points. Of course, the Federal Reserve may make the mistake of lagging behind the curve, but based on its actual performance in recent years, it is hard to say that the Federal Reserve has performed poorly. On the contrary, many experts believe that the Federal Reserve's performance in this rate hike cycle is commendable.

Due to the weakening of the US dollar, the Chinese yuan also saw continuous gains last week. Consistent with the views mentioned above, major trades that were once mainstream have experienced significant reversals in the past few weeks, and this phenomenon has also occurred with the Chinese yuan.

Gold is still shining, which may be the only or one of the few "surviving" mainstream trades, with Bitcoin's performance also remaining stable. With the US dollar falling, gold rising, this logic seems very solid. Of course, when the US dollar rises, gold's performance remains strong as well. So, in the end, the ultimate standout is gold.

Authors: Zhou Hao, Sun Yingchao, Source: Guojun Securities, Original Title: "All POPULAR TRADE, all in UNWIND"