JP Morgan has warned that the unwinding of so-called carry trades still has some way to go, risking deeper turmoil in financial markets – Michael M Santiago/Getty Images
The global stock market rout has a long way to go, analysis by a Wall Street bank has indicated, as European markets once again turn negative.
JP Morgan analysts have issued the warning about so-called “carry trades”, which are thought to have partly caused the turmoil on financial markets that wiped £40bn off the FTSE 100 on Monday.
Carry trades involve borrowing at low cost in one currency to achieve higher returns from investments in another currency.
One of the most recent examples has been to borrow Japanese yen but traders have been unwinding these deals after the Bank of Japan decided to raise interest rates for only the second time in 17 years last week.
Traders scrambled to sell higher risk, dollar-denominated assets to cover suddenly higher borrowing costs, plus losses from foreign exchange rate changes and losses in asset values as share prices plunged.
Also, hedge funds that conduct carry trades use computer models to help maximize their returns versus their risks. They needed to sell shares to maintain acceptable risk profiles.
Arindam Sandilya, co-head of global FX strategy at the bank, told Bloomberg TV: “We are not done by any stretch.
“The carry trade unwind, at least within the speculative investing community, is somewhere between 50pc to 60pc complete.”
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06:14 PM BST
Signing off…
That’s all from me for tonight. Thanks for reading.
See you tomorrow for more breaking business news.
06:07 PM BST
‘Sigh of relief’ for investors as stocks regain lost ground
Danni Hewson, head of financial analysis at AJ Bell, has weighed in on today’s trading.
“It was a day when investors breathed a sigh of relief and more than a few indulged in a spot of bargain hunting,” she said.
“Whilst nerves are still very much on show and it was less ‘turnaround Tuesday’ and more ‘trying hard Tuesday’, some ground was made up after Monday’s rather spectacular…
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