Prominent Wall Street short interest: Yen arbitrage risk still affects US stocks
Wall Street strategist Michael Wilson stated that if the Federal Reserve cuts interest rates significantly this month, the US stock market will face the risk of unwinding yen carry trades. He believes that an initial rate cut of more than 25 basis points could support the yen, prompting Japanese traders to withdraw from US assets, potentially triggering a negative reaction in the stock market. Since mid-July, concerns about an economic hard landing have slowed the upward momentum of the US stock market. Wilson predicts that the stock market will not rise unless the bond market trusts the Fed's policy or there is a significant improvement in growth data, with volatility expected to remain high on the eve of the Fed meeting
According to the VESYNC Financial APP, Michael Wilson, a long-time bear on Wall Street and strategist at Morgan Stanley, stated that if the Federal Reserve cuts interest rates significantly this month, the US stock market will face the risk of further unwinding of yen carry trades.
Wilson, who was one of Wall Street's largest stock bears until May, stated that a rate cut of more than 25 basis points for the first time could support the yen. This would stimulate Japanese forex traders to withdraw from US assets after domestic interest rates rise, thus repeating the pattern that disrupted global markets last month.
In a report, Wilson wrote, "The unwinding of yen carry trades may still be a hidden risk factor. The rapid decline in US front-end rates could lead to further yen strength, triggering a negative reaction in US risk assets."
Due to growing concerns about an economic hard landing, the US stock market has slowed its rise since mid-July. After the Bank of Japan raised rates in July, the yen also surged, leading to the unwinding of billions of dollars in carry trades.
Shortly thereafter, JP Morgan stated that three-quarters of these trades had been canceled.
Last week, as data showed a cooling labor market, the S&P 500 index, one of the benchmark indices, faced another round of selling. According to swap data, traders are fully expecting the Fed to cut rates by over 100 basis points before the end of the year.
Wilson correctly predicted the downturn in the US stock market this summer, stating that the bond market has already reflected that the central bank has waited too long to ease policy.
Wilson stated that he does not expect the stock market to rise, "unless the bond market begins to believe that the Fed is no longer behind, growth data reverses and materially improves, or additional policy stimulus measures are introduced."
The strategist expects that volatility will remain high in the lead-up to the Fed meeting next week