The recent declines in global markets have wiped out three-quarters of global interest trading, US bank JP Morgan said.
Carry trade is a trading strategy that involves borrowing at a low interest rate and investing in an asset that offers a higher rate of return. It usually involves borrowing in a currency with a low interest rate and converting the borrowed amount into another currency. The proceeds are deposited in the second currency if it offers a higher interest rate.
wipe out revenue
Yields in emerging markets and global carry trade baskets the bank tracks have fallen by about 10% since May, wiping out current-year revenues and significantly reducing accumulated profits since the end of 2022, the bank’s strategists Antonin Delaire, Meera Chandan and Kong Bad wrote in a note to clients, part of which was reported by Bloomberg.
A wave of declines hit global markets at the end of last week and the beginning of trading this week due to weaker-than-expected US economic data.
The US Labor Department reported last Friday that the unemployment rate rose to 4.3%, as employers added 114,000 jobs in July, a weaker-than-expected performance.
With the unemployment rate now at its highest level since emerging from the pandemic-induced recession in 2021, economists, banking analysts and investors have warned that signs of a recession are becoming more apparent.
volatile trade
The interest rate trade has been volatile for months, and took a hit over the past week as global market volatility increased, amid concerns of a rapid rate cut by the US Federal Reserve and a larger-than-expected rate hike by the Bank of Japan.
Strategists said there was little chance of the carry trade recovering in August, noting that it “does not offer an attractive risk reward. The basket yield has declined since its 2023 highs and is not sufficient compensation for maintaining high levels of risk in emerging markets during the US election.”
