A shiver ran through the global stock market on Monday as investors gauged rising interest rates in Japan, the strength of the U.S. economy and the path ahead for AI.
The result was a sell-off that spread from Tokyo to Paris to New York, pushing apparel, luxury, retail and beauty stocks lower almost across the board.
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Among the fashion decliners were Fast Retailing, down 9.6 percent to 36,470 yen in Tokyo; Mytheresa, 6.8 percent to $3.71; Macy’s Inc., 4.7 percent to $15.18; Salvatore Ferragamo, 4.5 percent to 7.63 euros; Target Corp., 3.8 percent to $133.87; Nike Inc. 3.5 percent to $71.42; The Estée Lauder Cos., 3.5 percent to $92.20; Burberry Group, 3.3 percent to 7.06 pounds, and Kering, 2.6 percent to 265.35 euros.
While fashion was caught up in the selling, it was not at the center of it.
Pressure has been building in the global system, particularly as investors watched to see if the U.S. Federal Reserve would at last start to cut interest rates to help juice the economy, which is now cooling down after a bout of post-pandemic inflation.
Last week, the U.S. unemployment rate rose to 4.3 percent — a level not seen since late 2021, indicating to many that the Fed would act soon to keep the economy from sinking into recession.
At the same time, Japan, which had been keeping its interest rates low in hopes of spurring its economy along, decided it had had enough and pushed its rates higher.
Those two realities came together in dramatic fashion on Monday, when the Nikkei 225 in Tokyo plummeted 12.4 percent, the FTSE 100 in London dropped 2 percent and the S&P 500 fell 3 percent.
“What you’re seeing is the unwinding of what’s called the carry trade,” said Joe Brusuelas, chief economist at RSM. “It’s a $4 trillion trade that’s massively leveraged up.”
In essence, investors have been borrowing money in yen to take advantage of low interest rates in Japan and using that money to bet on stocks in the West.
“The Japanese yen has increased against the dollar by about 18 percent over the past month making yen-denominated debt much more expensive,” Brusuelas said. “So they’re selling off U.S. equities to pay off those [debts].”
While $4 trillion is a lot of money — even in the context of the global market — Brusuelas said the pivot away from Japan would not break the market.
“The sun’s going to come up tomorrow,” he said. “We’re all going to live.”
And, in the U.S. at least, it looks to be with lower interest rates coming sooner than later.
“The Federal Reserve is going to have to reduce its policy rate at its September 18 meeting,” Brusuelas said. “The real question is, will it be a 25 basis point cut or a 50 basis point cut? Consumers are going to see the interest rate on those variable credit cards likely fall. They’re going to be able to borrow to buy more. Lower interest rates favor housing, manufacturing and consumers who are all notoriously interest rate sensitive.”
Even so, this is a delicate time with so much money sloshing back and forth between markets, with the Federal Reserve about to change course in the midst of a contentious U.S. election and investors starting to cool on AI — one of the major investing themes of the year.
A UBS analysis of the market noted that the AI tailwind had “begun to falter as investors have started to lose patience on monetization timelines … concentration risk in the theme has grown, with electrification companies to copper miners to data centers getting sucked into its wake.”
That could leave investors looking for the next big thing, although analysts don’t expect it to be retail, where consumers have proven cautious, perhaps sensing that the rest of the world needs to settle down before they go back into action.
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