Fed Can’t Stop Dow Slide, Japanese Yen Dominates

The Euro saw a record drop against the Yen, losing nearly four percent to daily lows of ¥149.99. British Pound bulls were similarly punished, with the Sterling-Yen shedding an incredible ¥8.00 to ¥221.43 through time of writing. Of course, the US dollar was no exception to the rule—falling to 14 month lows of ¥111.97.

US economic data took a back seat to overwhelming market volatility, with equity routs and credit scares forcing the US Federal Reserve to re-inject liquidity to lending exchanges. Such a move was little avail, however, as the Dow Jones Industrial Average continued its daily plunge. A later intraday reversal in the Dow ameliorated the simultaneous carry trade unwind, but the Japanese Yen nonetheless continued astoundingly higher through afternoon trade.  

Major European bourses closed 2-4 percent lower and many breached negative territory on a year-to-date basis. Given a fairly recent emphasis on record highs in corporate shares around the world, this is an astounding turnaround in such a short period of time. After the European market closed, US markets reversed earlier declines—sending the Dow a full 243 points off of its daily lows. Despite the bounce, the S&P 500 Index now rests 1.43 percent off of its January open at 1,398. The tech-heavy NASDAQ Composite is now a meager 0.7 percent higher from the 2006 close, while the Dow Jones Industrial Average retains the title of best US performer at +2.2 percent year-to-date.

Questions remain as to whether the short-term rebound in equities may continue, however, as any further shocks in liquidity would only doom risky assets to continued drops. This is most easily visible in highly-leveraged Japanese Yen shorts, with margin calls forcing traders to unwind positioning. Given a recent pattern of carry unwind continuation through later Asia session trade, it seems ill-advised to re-enter previous speculative bets on Yen depreciation. Indeed, little stands in the way of further drops across popular high-yielding currencies. The New Zealand and Australian dollars have already posted their largest single-day tumbles in decades, with Asian desks likely to continue selling the previously popular currencies.  

Government bond markets unsurprisingly benefited from the day’s financial mayhem, with the benchmark 10-Year Treasury note adding an incredible 7/8 points to 101 and 1/16. Yields on the debt issue subsequently neared their lowest since May, 2006, losing 11 basis points to 4.61 percent.