Investors were warned today that Monday’s stock market rout is only the beginning of a correction with more turbulence to come.
Wall St bank JP Morgan warned that the “carry trades” chaos that was blamed for much of the turmoil still has a long way to go.
Arindam Sandilya, JPM's co-head of global FX strategy, told Bloomberg TV: “We are not done by any stretch.
“The carry trade unwind, at least within the speculative investing community, is somewhere between 50% to 60% complete.”
Carry trades involve investors borrowing currency at a low cost to help achieve greater returns by investing in another country.
In the case of yesterday, investors had been borrowing the Japanese yen as it remains cheap against the dollar and interest rates remain low.
Funds borrowed in the yen would then be invested into US stocks and government bonds in a bid for greater returns.
However, the Bank of Japan decided to raise interest rates for the second time in 17 years last week, leading to hordes of investors having to unwind their carry trades.
In reaction to the rate hike, the Japanese yen surged against the US dollar.
Traders were therefore forced to sell higher-risk investments in the face of higher borrowing costs, while also suffering losses from foreign exchange changes and reduction in valuations.
Hedge funds that conduct carry trades use computer models to help maximize their returns versus their risks leading to a surge in automated trading.
This was compounded by it being the holiday season in European markets when junior traders are in charge and generally told 'don’t do anything'.
One trader told the Telegraph (reportedly from the south of France): “Because of holidays, people are away and aren’t making as many decisions to buy something new.
“You will get more algos [algorithm] trading.”