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The clouds of gloom have not yet lifted! A small warning from Morgan Stanley: "Black Monday" is just a "dress rehearsal" for the future trend.

AInvestMonday, Aug 19, 2024 3:00 am ET
1min read

JP Morgan said the sudden sell-off that caused the biggest two-year drop in the market may foreshadow future trends.

The bank's analysts said the double worry of a slowdown in economic growth and hedge fund unwinds of carry trades made it difficult for the market to cope with both.

However, since then, the market has recovered all its losses and found itself in the midst of positive economic data, leading many on Wall Street to conclude that the event was an overreaction to a temporary blip in the data.

“Many market participants have viewed the recent surge in crowded trades as a fluke or flash crash, but we believe it is more about positioning for what is to come,” the bank's analysts said in a report last Thursday.

The sell-off this month came as US unemployment jumped and accelerated as Japan's stock market suffered its biggest one-day drop since Black Monday in 1987. The unwinds of so-called yen carry trades were blamed for global market turmoil.

Over the past two years, investors borrowed the yen at low interest rates in Japan and sold it in a panic after the Bank of Japan's surprise interest rate hike to meet margin calls.

While it was big, the bank's analysts predict that worries over carry trades will not trigger future volatility because many investors will be too shaken up to resume the strategy after this month.

“Carry trades will likely again become a problem, but with investors hurt and not everyone recovering, getting to new highs should be more difficult,” the bank's analysts said.

They added: “Instead, we believe a re-emergence of growth concerns is a possible trigger.”

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