Carry trade may not be an issue for tech: Strategist

The unraveling yen carry trade was one reason the tech sector saw a sell-off earlier in the week. Questions began to arise around how much of an impact this will have and if things will get better, especially as worries about interest rates continue to linger.

TD Securities' global head of FX and EM strategy, Mark McCormick, joined Catalysts to provide insight into the carry trade and its effect on the tech sector.

McCormick believes the current situation in Japan is "challenging for tech largely because tech is like premised, particularly on easy money and easy monetary conditions and low interest rates." He argues for stocks like Nvidia (NVDA) it could be a positive because "the yen [is] basically rallying because there's a repatriation of capital coming home. And that's causing basically a trigger of interest rates to move higher, particularly real rates. That could also be a catalyst to kind of provide the same outcome and sees earnings start to decline as well."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Nicholas Jacobino

Video Transcript

But now I want to do a comparison of tech to currencies.

Uh If you're a tech investor, I feel like this week really had you looking at the dollar yen.

And I'm curious if the reverse is going to be true.

If, if we get bad NVIDIA earnings, for example, does the yen appreciate off of that?

It's hard to disentangle cause.

In fact, in all this because there's so many pieces II I think one thing that you could take away from the kind of the undermining of the N carry trade and where we see the end strengthening, where we see again the boj hiking and we see we're calling it panic, the government, the pension funds and the central bank now seem to want a stronger currency.

Uh The one consequence of this is if you think about where a lot of money has gone from.

Japan, you could track that money as well as it's gone into European bonds.

Uh they have picked up yield in France, they picked up yield and in other European markets.

So a consequence of these flows kind of repatriating coming home is one real rates go up.

So curves deepen real rates go up.

This is challenging for tech largely because tech is like premised particularly on easy money and and easy monetary conditions and low interest rates.

So I would say, you know, it could be either or like if Navidi is weak and that continues to see a further draw down of risk sentiment that would strengthen the yen.

But also again, the yen basically rallying because there's a repatriation of capital coming home and that's causing basically a trigger of interest rates to move higher, particularly real rates.

That could also be a catalyst that kind of provides the same outcome and sees earnings start to decline as well.

Yeah, mark to that point at the catalyst of all this, it seems to be this growth shock, right?

What does that then tell us about the wild swings or the volatility that that, that we could then continue to see play out given not only uncertainty here in the US, but also just on a global scale as well.

It's a great question because I think investors have been just focused on the US and its US is slowing.

If you look at fed pricing for 2024 and 2025 the fed is supposed to be the most Dovish central bank in the world next year, that makes very little sense to me.

Um again, because if you look at like the impulsive data, we track and we run through our models and we trade in currencies um as portfolios, if you look at data rs, data trends, and you kind of look at the change in consensus growth expectations.

China is in a worse place in the US right now.

Um So you can't have the US slowing down China slowing down in Europe, essentially not growing that much, but coming from very low levels, the European momentum has already deteriorated as well.

If you look at just global manufacturing PM is essentially the global economy is now deteriorating.

So I'd say, you know, again, a big piece of this is that you can't have this risk on sentiment and low volatility with the uncertainty around the elections, the uncertainty around geopolitics and again, have an environment where we're moving away from carry trades.

That's just one that is not conducive to very low macro volatility in a weak dollar.

So I I think the global growth picture has to be taken in the context that if the US is slowing other countries have to offset it to allow risk sentiment to be stable.

So I would say again, what we're seeing is a marked slowdown in global growth expectations, which is not great for overall sentiment.