BANGKOK (AP) — The mayhem that swept across world markets this week was partly caused by a market strategy known as the “carry trade.”
Japan’s benchmark Nikkei 225 plunged 12.4% on Monday and markets in Europe and North America suffered outsized losses as traders sold stocks to help cover rising risks from investments made using cheaply financed funds borrowed mostly in Japanese yen.
Markets recovered much of their losses on Tuesday. But the damage lingers.
They were jolted by a combination of factors, including dread of a possible recession in the United States, the world's largest economy, and worries that technology shares have shot way too high this year.
But the scale of the declines was exaggerated by the rush to sell U.S. dollars due to carry trade deals that had helped drive markets to record levels.
Carry trades involve borrowing at low cost in one currency to achieve higher returns from investments in another currency. One of the most recent examples has been to borrow Japanese yen, expecting the currency to remain cheap against the U.S. dollar and for Japanese interest rates to remain low. The borrowed funds would then be invested in U.S. stocks and Treasury bonds in anticipation of a higher return.
The key factor behind a carry trade is a difference in interest rates. The Bank of Japan has kept interest rates at or near zero for years, trying to encourage more spending and spur economic growth. Last week, it raised its main interest rate from nearly zero. Higher interest rates tend to boost the value of a nation's currency, and the Japanese yen surged against the U.S. dollar. Traders scrambled to sell higher risk, dollar-denominated assets to cover suddenly higher borrowing costs, plus losses from foreign exchange rate changes and losses in asset values as share prices plunged. Also, hedge funds that conduct carry trades use computer models to help maximize their returns versus their risks. They needed to sell shares to maintain acceptable risk profiles.
Carry trades tend to make the most sense when foreign exchange rates are relatively stable and investors can tap into higher yielding market opportunities, like the recent runups of stock prices in places like the United States. The recent market upheavals obliged traders to cover their debts by buying yen and other carry trade currencies and selling relatively more of the higher risk assets they bought under more favorable conditions. Also, carry trades are very lucrative when stocks or other investments are rising, but losses can snowball when thousands of traders are pressured to sell stocks or other assets all at once. “A massive global carry trade unwind was the spark that lit the fuse for this market Armageddon," Stephen Innes of SPI Asset Management said. “One defining characteristic of these self-perpetuating market melts is the vicious cycle where a sell-off increases realized volatility.”
The gap between the main interest rate in Japan, now at 0.25%, and the Federal Reserve’s benchmark rate of 5%-5.25% is still wide but is likely to narrow as the Fed cuts rates and Japan raises its rates. Financial markets appeared to have calmed Tuesday, with Japan's Nikkei 225 index gaining 10.2% and other markets mostly higher. Analysts are divided over whether this bout of volatility in the markets has passed or if there is more to come. Regardless, carry trades have been used for decades. They contributed to a meltdown in Iceland's financial sector in 2007-2008 where investors borrowed in yen or Swiss francs to take advantage of high Icelandic interest rates. During this latest market upset, Mexico, another focus of the yen carry trade, has seen its peso fall more than 6%. The popular but potentially complicated trading strategy is likely to remain a wild card for investors, especially in times of high market volatility.
Currency traders watch monitors near a screen, back, showing the Korea Composite Stock Price Index (KOSPI), top left, and the foreign exchange rate between U.S. dollar and South Korean won, top center, at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Tuesday, Aug. 6, 2024. (AP Photo/Ahn Young-joon)
MILWAUKEE (AP) — Jake Bauers hit an RBI single in the ninth inning and the Milwaukee Brewers, who had clinched the NL Central earlier when the Cubs lost, beat Philadelphia 2-1 on Wednesday night to prevent the Phillies from securing a playoff berth.
Bauers' hit off Phillies closer Carlos Estévez (4-5) scored Jackson Chourio, who had tripled.
“I think the vibe in the clubhouse all day was, that's great that we (clinched), but we need to win this game," Bauers said. “It was intense, man, it was intense. You could feel the pressure."
Milwaukee closer Devin Williams (1-0) struck out Alec Bohm, Bryson Stott and Brandon Marsh in order in the ninth.
Milwaukee clinched its second straight division title and made the playoffs for the sixth time in the last seven seasons by virtue of the Chicago Cubs’ 5-3 loss to the Oakland Athletics Wednesday. Chicago is still fighting for a wild card.
Milwaukee’s Freddy Peralta, making his career-high 31st start of the season, allowed one run on two hits in five innings, striking out nine and walking two.
Philadelphia starter Aaron Nola, second in the NL in innings pitched, went seven innings, allowing one run on three hits while striking out nine and walking one. He had given up 10 earned runs in nine innings in his previous two starts.
“My command was pretty good, I was getting early outs,” Nola said.
“They're definitely a grinding team. Just trying to execute my pitches and get first-pitch strikes and get the leadoff guy out.”
The teams struck out 28 times combined.
Phillies batters struck out 16 times Tuesday and 16 times Wednesday.
“Two really good teams, low scoring, tight games," Philadelphia manager Rob Thomson said. "Those are the games you certainly like to win and hate to lose.”
Milwaukee took the series, winning 6-2 on Monday. Philadelphia won 5-1 on Tuesday.
Bohm gave Philadelphia a 1-0 lead in the second inning with his first home run since Aug. 15.
Rhys Hoskins’ 25th homer tied the game in the fifth inning. The former Phillie also doubled.
“Are you surprised? Of course you're not surprised," Hoskins said of the come-from-behind win. "That's what we've been doing all year.”
Milwaukee right-hander Joe Ross allowed a single and a walk upon taking over for Peralta to start the sixth inning. But Ross retired Nick Castellanos and Bohm before being replaced by left-hander Jared Koenig, who got Stott to ground out on the first pitch.
After Chourio's leadoff triple in the ninth, Estévez intentionally walked William Contreras, struck out Garrett Mitchell and walked Willy Adames, loading the bases before Bauers' single.
“Everybody was doubting us at the beginning, that we were going to be able to do this," Adames said. “We proved them wrong. Hopefully we can go all the way and win it all.”
The Phillies’ magic number to qualify for the playoffs is one, and four to clinch the NL East.
The Phillies made the playoffs the past two seasons, losing to Arizona in the 2023 NL Championship Series and to Houston in the 2022 World Series.
UP NEXT
Phillies: Open a four-game series Thursday in New York against the Mets, who are battling for a wild card. Phillies RHP Taijuan Walker (3-6, 6.29 ERA) faces RHP Luis Severino (10-6, 3.77).
Brewers: Open a four-game series Thursday in Milwaukee against Arizona with RHP Tobias Myers (8-5, 3.07 ERA). The wild card-contending Diamondbacks will start RHP Brandon Pfaadt (9-9, 4.81).
AP MLB: https://apnews.com/hub/mlb
Milwaukee Brewers' Jackson Chourio reacts after hitting a triple during the ninth inning of a baseball game against the Philadelphia Phillies Wednesday, Sept. 18, 2024, in Milwaukee. (AP Photo/Morry Gash)
Philadelphia Phillies' Kyle Schwarber hits a single during the eighth inning of a baseball game against the Milwaukee Brewers Wednesday, Sept. 18, 2024, in Milwaukee. (AP Photo/Morry Gash)
Milwaukee Brewers' Rhys Hoskins hits a home run during the fifth inning of a baseball game against the Philadelphia Phillies Wednesday, Sept. 18, 2024, in Milwaukee. (AP Photo/Morry Gash)
Milwaukee Brewers' Rhys Hoskins hits a home run during the fifth inning of a baseball game against the Philadelphia Phillies Wednesday, Sept. 18, 2024, in Milwaukee. (AP Photo/Morry Gash)
Philadelphia Phillies pitcher Aaron Nola throws during the fifth inning of a baseball game against the Philadelphia Phillies Wednesday, Sept. 18, 2024, in Milwaukee. (AP Photo/Morry Gash)
Milwaukee Brewers pitcher Devin Williams reacts after striking out Philadelphia Phillies' Brandon Marsh during the ninth inning of a baseball game Wednesday, Sept. 18, 2024, in Milwaukee. (AP Photo/Morry Gash)
Milwaukee Brewers' Rhys Hoskins is congratulated after hitting a home run during the fifth inning of a baseball game against the Philadelphia Phillies Wednesday, Sept. 18, 2024, in Milwaukee. (AP Photo/Morry Gash)
The Milwaukee Brewers celebrate after a baseball game against the Philadelphia Phillies Wednesday, Sept. 18, 2024, in Milwaukee. The Brewers won 2-1 and clinched the National League Central division. (AP Photo/Morry Gash)
Milwaukee Brewers' Jake Bauers reacts after hitting a walk-off RBI single after a baseball game against the Philadelphia Phillies Wednesday, Sept. 18, 2024, in Milwaukee. (AP Photo/Morry Gash)
Milwaukee Brewers' Jake Bauers is congratulated by Devin Williams and Garrett Mitchell after hitting a walk-off RBI single after a baseball game against the Philadelphia Phillies Wednesday, Sept. 18, 2024, in Milwaukee. (AP Photo/Morry Gash)
