Recovery in Major Indices

On Friday, there was a slight recovery in global stock markets, with the S&P 500 and Nasdaq Composite indexes both increasing by 0.31% and 0.24% respectively. The Dow Jones Industrial Average also saw a rise of 0.11%, reaching 39,489.37. The MSCI All Country stock index also saw a gain of 0.55%, recuperating a majority of the losses experienced during the week. In Japan, the Nikkei stock index closed 0.56% higher, reversing most of the losses from the 12.4% crash on Monday. The U.S. dollar index also fell by 0.12% against other major currencies, while bond yields decreased as confidence returned to the markets.

Driver Behind The Recovery

This recovery was driven by positive economic data, including a larger-than-expected decrease in U.S. jobless claims and statements from Federal Reserve policymakers indicating a decrease in inflation that would warrant interest rate cuts. Oil prices also saw a slight increase due to concerns about supply issues in the Middle East. Despite the strong recovery, some analysts advised caution due to potential volatility in August and differing decisions on interest rates by central banks.

Carry Trade Unwind

The Bank of Japan's choice to increase its main interest rate from near zero has implications for the global economy, especially for the "carry trade" strategy where investors borrow money at low rates in Japan and invest in higher-yielding assets in other countries. 13

Analysts Predict More Pain
JP Morgan Chase predicts that the recent unwinding of carry trades still has a ways to go, with the yen continuing to be undervalued. According to Arindam Sandilya, co-head of global FX strategy at JP Morgan Chase, the carry trade unwind is only about 50-60% complete, suggesting that there may be more to come.