Recently, the global stock market has fallen sharply, mainly due to the announcement by the Bank of Japan to hike its benchmark interest rate and reduced their treasury debt holdings of 400 billion yen each quarter.

It resulted in a rapid appreciation of the yen and caused the yen carry-trade unwinding, which threw the global stock markets into a sharp sell-off. However, from the actual measures of the BoJ, the impact on its QT is huge. As of the end of July, the Bank of Japan held a total of 592 trillion yen of Japanese treasury debts. Even if it was reduced by 400 billion yuan per quarter, the total number of QT was only 0.4% of BoJ’s total holdings. In fact, BoJ held more treasury debts since last year (Figure 1). Therefore, we believe that the true factor that triggered recent sell-off is that the yen carry-trade was too crowded before, and BoJ’s QT was only a sentimental trigger of deleveraging.

Source: Straits Financial

CFTC showed that the yen speculative short position began to unwind quickly after reaching 223,600 historical apexes on 9th July, and the unwinding accelerated. The latest data shows that the level of yen speculative short position holding has been reduced to levels lower than the beginning of the year (Figure 2). Therefore, we believe that the yen carry-trade unwinding may have come to an end. Although the overall yen may not be devalued again, the overall rising yen promoted by short-cover and the rapid decline in stocks may have ended.

Source: Straits Financial

In addition, due to the acceleration of debt issuance by US treasury department as well as a deceleration of its fiscal expenditure, the liquidity of US domestic financial markets  went down in July. For example, the total amount of "Money in circulation + Bank reserve" on the Fed's balance sheet has decreased from USD5.81 trillion in early June to USD5.53 trillion at the end of July. Although this is not a large decline, in the context of global liquidity seize due to the yen carry-trade unwinding, the stock market tumbled further.

Source: Straits Financial

Last week, it has shown that the Fed's support for market liquidity has increased significantly. For example, from May to the end of July, the number of ONRRP held by the Fed has basically maintained more than USD400 billion. Since the beginning of this week, the total ONRRP has fallen to USD286 billion, indicating that the Fed released more liquidity into the market. In addition, the scale of TGA on treasury department has also fallen to a certain extent, showing that the treasury department also increased their spending. Therefore, we believe that short term liquidity risk is mostly over.

Source: Straits Financial

Source: Straits Financial