Noted Wall Street bear: Risks from yen carry trade still affecting US stocks

Michael Wilson, a strategist at Morgan Stanley who has long been one of Wall Street's biggest bears, said US stocks would face further unwinding of yen carry trades if the Federal Reserve cuts interest rates sharply this month. The strategist, who until May was one of the biggest stock bears on Wall Street, said the first cut of more than 25 basis points would support the yen, prompting Japanese currency traders to exit US assets after domestic rates rise, repeating the pattern that rattled global markets last month. “Yen carry trade unwinds may still be a lurking risk factor. A rapid drop in US forward rates could lead to further yen strength, which would trigger a negative reaction in US risk assets,” Mr Wilson wrote in a note. US stocks have slowed since mid-July as concerns about a hard landing have increased. The yen also surged after the Bank of Japan raised rates in July, forcing billions of dollars of carry trades to be unwound. Morgan Stanley said shortly afterwards that three-quarters of those trades had been unwound. Last week, one of the benchmark indexes, the S&P 500, again sold off after data showed the labour market was cooling. Traders are already fully pricing in more than 100 basis points of rate cuts by the end of the year, according to swap data. Mr Wilson, who correctly predicted the timing of the US stock market's downturn this summer, said the bond market had already factored in too much delay from the central bank in easing policy. He said he did not expect stocks to rise “until the bond market starts to believe the Fed is no longer behind the curve, growth data turns and materially improves, or additional policy stimulus is announced”. The strategist expects volatility to remain high ahead of next week's Fed meeting.