Japan, the temporary puppet master for US markets
There’s a humongous tell that this week’s price action is a lot more technical, mechanical, and flow-driven compared to the macro worries that largely defined Friday’s selloff on the heels of a soft US jobs report.
And that’s the extent to which US markets are taking their cues from Japan’s currency and stock market.
futures were red initially yesterday afternoon on SMCI and ABNB, but overnight the yen dropped, nikkei soared. guess we’re still trapped by Japan tractor-beam for a little while
— aubrey plaza accord (@selling_theta) August 7, 2024
Right now, Japan is the straw that stirs the drink. Nearly every swoon and surge, every little mini-turn in the Nikkei 225 and the US dollar versus the Japanese yen this week, has been mimicked directionally by the US stock market.
The basic thinking here is that as leveraged bets against the Japanese yen are unwound, it doesn’t just affect that trade, but every popular position in a portfolio. The trades become hyper-correlated because common owners of all these assets are responding to the same shock in the same way.
But with all due respect to Japan and its currency, those two things simply aren’t going to be the crucial drivers of US stocks over the medium term – that’s up to earnings and the business cycle.
