Markets should watch out for the summer fling

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Summer months are a time to take a break, sunlight with friends and family, and financial markets that are going for a small or non -existent reason.

As we approach this season in the northern hemisphere and markets, the usual process of mitigating and accompanying begins, there is every danger to a kind of glow in the coming months.

Boot came last week with some strange movements in the Japanese yen. In general, the yen is one of the currencies, along with the Swiss dollar and franc, which works well in times of stress. It is not a haven in this way, but folklore on the market is that during turbulent or frightening periods, Japanese investors bring their money parked in external assets, and the yen with clouds.

Whether these flowing flows really happen on a large scale is a matter of discussion. They may not do that. But muscle memory in the market is a strong strength, so when bad things occur, from any flavor but especially in political geography, the yen pushes up.

It is not the case with the latest condensation of violence between Iran and Israel, with the participation of the United States as well. Instead of shooting above, the yen weakened. Not significantly, but the dollar rose to the highest level in 148 yen by the beginning of this week, which represents the weakest point of yen in one month.

The lowest level in the yen may not seem like a big deal, and for most people, it was not the case. The problem is determined here because betting on the weaker dollar, and the strongest softness, is very popular among hedge funds and other speculative investors. When this bet started to collapse, we saw what Dominic Boning, an analyst in Nomura, described as “bad pressure”. He approached his own recommendation to customers to buy the Japanese currency – it was not a fun moment to collect ideas in an investment bank.

It is important, the episode indicates that the bet against Pak flourishes a little, and does not need a long memory to remember how crowded bets can correspond quickly. Only last summer, the yen rose up, and at the same time, American technology shares decreased as two very linked and two popular functions in hedge boxes fell to the wall and soon reflected. The markets became very messy (or so I was told – I had a good feeling of sitting on this on sunlight in Turkey) so that the debt markets were at some point priced at a rate of interest in emergency situations from the American Federal Reserve.

There was no reduction in emergency situations, of course. But the markets are particularly vulnerable to overcoming them when the summer vacation season pulls people away from their offices and the gaps begin to open as the market prices are usually trading.

It is worth it, then, closely monitoring consensus areas in the financial markets, if they are exposed to similar summer mutations. The yen is one of this area. If the United States is unwilling or unable to reduce interest rates, either due to sticky inflation or because the economy works better than fear in the opening months of this year, the climb in the yen that hopes not to be achieved. Investment banks and central banks alike grow the lowest depression in the American view, and this is a bullish risk to take seriously.

Chris Sklona, ​​an analyst at Daiwa Capital Markets, believes that the continuous regulatory decline in the dollar is still the most likely from here, and that this summer prediction is still likely to be in its exchange rate with the yen, although these expectations may be, as he noticed, the “famous last words”.

Shock, by definition, is impossible to predict. But SCICLUNA indicates that a better place to watch may be other pockets of markets that have been going significantly so far this year and may pay her luck and provide overcrowding slightly.

Some European currencies, for example, such as the Swiss franc and the Swedish Carona, have had amazing operation. European stocks have been carved an impressive and unfamiliar rise. Even those, like me, who believe in long -term alternate from the United States and to Europe, can admit that climbing 18 percent in German stocks may be a little excessive.

Meanwhile, American stocks wander around Europe. If president Donald Trump continues to get out of difficult economic decisions, they may be able to catch a knee and the dollar can seize a break. Feelings here may be very dark.

Small particles in summer tend to fade faster Tan, but you can burn in this process. A little be careful in the summer has a long way.

katie.martin@ft.com