Looking at the whys and wherefores of extreme stock market volatility
Financial markets/economy
Posted by MoneyController on 12.08.2024
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A number of factors contributed to the sharp stock market corrections that occurred in recent weeks.
Here are some of these factors: really high valuations of some stocks, especially US tech stocks; below-expected quarterly reports of those same high-priced companies; further postponement of the interest rate cut by Jerome Powell's Federal Reserve; limitations of carry trade opportunities in Japan, following the Bank of Japan's interest rate hike; and the strategy of some investors who, in the run-up to the summer, decided to capitalise on the stock market's rises by selling their shares.
In 'Il Sole 24 Ore', Vito Lops writes about the end of the 'Japanese carry trade bubble'. But how does it work? Until a few weeks ago, the low cost of the Japanese currency, the yen, particularly in relation to the dollar, as well as zero interest rates, made it possible to take cheap money from Japan and reinvest it in more profitable assets, such as US stock market securities. Now that the Bank of Japan has raised interest rates, Lops explains, many traders have closed their yen positions, partly because of the so-called 'margin call' mechanism, whereby positions are closed precisely to cash in the gains made in the most favourable situation.
Such crisis situations are taken by some investors as opportunities to restructure their portfolio strategy. For example, the fall in some stocks may represent a buying opportunity. Nevertheless, it is in any case very important - the experts explain - not to be dominated by so-called 'panic-selling', which risks turning only potential losses into certainties. Often, the only solution for savers and retail investors is to rely on an expert or a financial advisor.
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