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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The wonderful Spurious Correlations website teaches us not to read too much into stuff that happens at the same time. Yes, a chart of US per capita consumption of margarine from 2000 to 2009 looks awfully similar to a chart of the divorce rate in Maine over the same period, but it is difficult to argue that one caused the other.
Nonetheless, as silly, pattern-seeking humans, we continue to look for meaningful correlations all the time. We can’t help it.
One that I suspect does make sense is the curious case of the yen (it’s up, a lot) and tech stocks (they’re down, also a lot, at the same time). The two are the talk of the town among bankers and investors.
The thread that links these things together is weaker US inflation. A surprisingly low reading a week or so ago has fired up the expectation that US interest rates are poised to fall, in September or maybe even as soon as next week, if you take the latest analysis on the matter from former New York Fed president Bill Dudley as a signal. We have been here before, of course, but investors think it’s for real this time.
This has blown a hole out of today’s most extreme imbalance in currency markets, between the dollar, with its highest interest rates in decades, and the yen, which is still crawling out of the zero interest rate period that most other major economies left behind after the pandemic. The buck has dropped by more than 5 per cent against the yen since July 11, snapping a long and powerful updraft that has been an easy win for speculative investors for years.
But that weaker inflation data has also fired up small-cap US stocks, which tend to be beneficiaries of lower interest rate environments to a greater degree than their large- or even megacap cousins. Investors are now rushing into small caps, which is a neat excuse to take profits on sparklingly successful bets on big tech stocks, which in any case have been encountering more than their usual level of political stress as US presidential candidate Donald Trump makes reluctant noises about support for Taiwan. The rush out of big stocks and in to relative tiddlers is one of the strongest in decades.
As such, the tech-heavy Nasdaq Composite stocks index has dropped by 7 per cent over the same period as the dollar’s decline against the yen.
Are these two things a coincidence? Maybe. But it doesn’t smell like it.
Both the bet against the yen and that on tech stocks have been very popular among hedge funds. And for any investor, when one strategy turns sour, the pressure builds to bail out of others, too. These things can easily become self-reinforcing.
The classic example of this in action came from the Swiss franc, which blasted higher in 2015 when Switzerland’s central bank gave up on its efforts to hold the currency lower. Sadly for lots of hedge funds, they had not seen this coming. And when their Swiss franc bet went (very) wrong, they had to hop out of other wagers, as hedge fund group Man pointed out in a note this week. One index of favoured hedgie equity bets dropped by 5 per cent in the subsequent days, for example.
The ascent in the yen is happening at nothing like the speed of the ascent of the Swiss franc nearly a decade ago. Still, the link between the yen and tech stocks now seems more than a coincidence.
Heavy-hitting speculators are not necessarily wholly responsible here, and possible causation runs both ways. One hedge fund manager points out to me that Japanese investors binning their bets on US tech stocks and converting those incoming dollars back in to yen also appears to be playing a role.
What is clear, though, is that two of the more popular speculative bets are doing a little synchronised diving, and these things can turn into painful belly flops that splash innocent bystanders quite quickly.
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