Tech stocks, the Japanese yen, copper and others are all reversing
Joseph AdinolfiFollow
Last Updated: July 27, 2024 at 5:12 a.m. ET
First Published: July 26, 2024 at 4:55 p.m. ET
Some of the year’s most crowded trades have hit the rocks recently.Photo: AFP via Getty Images
Referenced Symbols
- SOXX-3.63%
- NDX-1.38%
- USDJPY-1.61%
- 1804601.45%
- S000.71%
- C000.12%
- W00-0.72%
- HG001.58%
- HSI2.25%
- GOOGL0.45%
The selloff in U.S. semiconductor and megacap stocks has sucked up most of investors’ attention over the past couple of weeks. But they aren’t the only momentum trades that have stopped working.
Across financial markets, bets that had reliably minted profits all year have come undone in July.
U.S.-traded semiconductors and Big Tech stocks have fallen sharply, with the iShares Semiconductor exchange-traded fund
down more than 13% since U.S. markets closed on July 10, while the Nasdaq-100
, the major index with the heaviest exposure to megacap stocks, is down nearly 8%, FactSet data show. Both experienced some relief on Friday, with the SOXX ETF and Nasdaq-100 gaining more than 2% and 1%, respectively, as U.S. stocks rallied.
In Japan, the yen
has powered higher against the dollar over the past two weeks after hitting its weakest level in 38 years earlier this month. At the same time, Japanese stocks JP:180460 have stumbled since finally taking out a record level last visited in 1989, FactSet data show.
“Going long tech and short the yen have been maybe the two most crowded trades in recent years that I can think of,” said Jeffrey Kleintop, chief global market strategist at Charles Schwab, during an interview with MarketWatch on Thursday.
Other popular trades peaked even earlier but have continued to unravel this month.
Copper prices and Chinese stocks have tumbled since hitting their 2024 highs around May 21, according to Louis-Vincent Gave, co-founder of Gavekal Research, who discussed the shift in a recent client note shared with MarketWatch.
Other commodities, like soybeans
, corn
and wheat
, have also “face-planted” since then, Gave said.
Copper futures on the New York Mercantile Exchange
have fallen nearly 6% so far in July, while the Hang Seng Index HK:HSI, which covers stocks trading in Hong Kong, was down nearly 4% as of the close of Asian markets on Friday.
In retrospect, the unwinding of these popular trades — particularly copper, the yen and U.S. semiconductor stocks — made sense, according to Gave. Prices had reached “stupid” levels and a pullback was likely overdue, he said.
While myriad fundamental and technical factors ultimately provided the spark, crowded positioning and leverage helped to hasten their undoing, strategists and traders told MarketWatch.
The question now is, how much longer it will continue? While nobody can say for sure, commentary from Federal Reserve Chairman Jerome Powell is the next obvious catalyst, according to Tom Essaye, founder of Sevens Report Research.
A meeting of the Bank of Japan’s leadership could also have an impact next week, especially if the central bank raises interest rates as investors increasingly expect, Kleintop said.
The spark
When the June consumer-price index report delivered a softer-than-expected reading on inflation earlier this month, it inspired investors to rush into trades that would benefit from more aggressive interest-rate cuts by the Federal Reserve.
That meant dumping the U.S. dollar in favor of the yen, and semiconductor and U.S. megacap technology stocks along with it. The rebound in the yen also hit Japanese stocks, as the weak currency had helped bolster profits of major exporters.
Bernard Drury, president and CEO of Drury Capital, a fund that employs systematic trend-following strategies, said the June CPI report was the “kiss of death” for both the short yen and long U.S. technology trades.
“The CPI tilted toward showing less inflation, and it set off a chain of events,” Drury said during an interview with MarketWatch on Thursday.
For the yen, there was an added twist. What appeared to be a well-timed intervention by the Bank of Japan helped to accelerate the currency’s rebound in the hours after the CPI data were released.
Expectations that the Bank of Japan could once again raise interest rates and loosen its grip on Japan’s government-bond market have also contributed to the yen’s rebound, Gave said.
The carry trade
On the surface, U.S. technology stocks and the Japanese yen might seem like they’re a world apart. But one popular trading strategy may have helped bind the two trades together.
At least some of the yen borrowed by traders who were short the currency was likely used to supercharge bullish bets on top-performing U.S. stocks, according to Kleintop and Steve Sosnick, chief strategist at Interactive Brokers.
On Wall Street, this is known as a carry trade. It involves borrowing in currencies with low interest rates, then swapping them for other currencies with higher rates. Traders can then pocket the interest-rate spread on their cash positions or use the money to buy other, higher-yielding assets.
When the CPI report caused short bets against the yen to unwind, traders were likely forced to dump some of the stocks they had bought with borrowed money.
This would explain the incredibly tight correlation between the yen and Big Tech stocks this month, Sosnick said. Since the start of July, the Nasdaq 100 has moved nearly in lockstep with the Japanese currency. It would also explain the brief lag between the move in the yen and the selloff in technology stocks on the day of the CPI report.
“There are probably plenty of issues weighing on tech, but I think the carry trade is at least in the background,” Kleintop told MarketWatch.
Kleintop added in a post on X that further weakness in the Japanese yen could add to the pain in U.S. tech stocks.
Among the other issues facing technology stocks, investors have recently been forced to confront doubts about how quickly these firms’ investments in artificial intelligence might pay off. Details from Alphabet Inc.’s
quarterly earnings report and conference call from earlier this week didn’t exactly inspire confidence.
As Gave pointed out, Alphabet executives basically acknowledged that they had not yet found a profitable commercial use for AI despite plowing tens of billions of dollars into servers and data centers. The company’s spending on capital expenditures nearly doubled last quarter compared with the same period in 2023.
Copper and Chinese stocks slide as Third Plenum disappoints
A meeting of senior Chinese Communist Party leaders that concluded last week helped inspire further losses for copper and Chinese stocks, Gave said.
Investors had high hopes that China’s leadership would take more dramatic action to aid local authorities struggling with heavy debt loads or to recapitalize the country’s bust property developers during the Third Plenum leadership summit, a major meeting held once every five years.
Instead, all they got was a statement that was heavy on buzzwords and light on concrete action.
Shortly afterward, the People’s Bank of China moved to cut short-term and long-term interest rates, which helped revive concerns about the country’s economy. Copper and Chinese stocks moved even lower in response.
See: Stock-market drop offers reminder that rate cuts don’t always cheer investors
Drury said shifting political winds in the U.S. appeared to be contributing as well. Should Republicans retake the White House, they would likely abandon most of the Democratic decarbonization agenda, including updates to the power grid that would require, among other things, a considerable amount of copper, he explained.
So far, the unwinding of all these trades has helped dent strong year-to-date returns for systematic traders and trend-following funds, according to performance data from SG Prime Services.
Still, Michael Hartnett of Bank of America Global Research said in a Friday client note that the unraveling has been “healthy” so far.
But it could turn “sinister,” he said, if trading breaks below certain thresholds, which he identified as 152 for the yen, $9,000 for copper and 18,700 for the Nasdaq 100.
All three appeared to be close to those levels Friday afternoon. One dollar bought 153.75 yen, down 0.1% on the day, while the Nasdaq 100 finished at 19,023.66, FactSet data show. The LME three-month copper contract settled at $9,111 per ton on Friday, according to CQG.
Steve Goldstein contributed.