Divergence between Carry-Trade Index and S&P 500 may signal stock reversal

The carry trade — a short/long trading strategy favored by hedge funds and a contributor to some of the most abrupt global markets reversals in the past 10 years — is looking frayed.

U.S. stock investors should take note.

Stocks have made only a modest pullback from their recent highs, with the S&P 500 SPX +0.39% ending Thursday 3% off its record. But other investment classes have made abrupt u-turns. Expectations the Federal Reserve will begin tapering the flow of monetary stimulus to the economy have pushed up U.S. bond yields and spurred a selloff in emerging markets debt, currencies and equities.

Part of that blame rests on an unwind of a 2013 carry trade of shorting, or borrowing against, the Japanese yen and U.S. dollar to buy assets in countries with higher interest rates. As investors started to rethink prospects for U.S. rates — the trade started to fall apart, extinguishing funding to bid up Brazilian stocks or the Australian dollar.

“Everyone was making big bets on emerging-markets fixed-income instruments and local currencies,” said Mark Mobius, executive chairman of Franklin Templeton’s Templeton Emerging Markets Group. When comments from the Fed suggested U.S. interest rates were going to rise, the view shifted to: “Why should I be in emerging markets debt?”


This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Mingze Wu

Mingze Wu

Currency Analyst at Market Pulse
Based in Singapore, Mingze Wu focuses on trading strategies and technical and fundamental analysis of major currency pairs. He has extensive trading experience across different asset classes and is well-versed in global market fundamentals. In addition to contributing articles to MarketPulseFX, Mingze centers on forex and macro-economic trends impacting the Asia Pacific region.
Mingze Wu