Rafael Dalmau started his Wall Street career on a very auspicious day, Black Monday, October 19, 1987, when the U.S. stock market fell more than 20% in a single day leading to global stock market losses estimated at more than 1.7 trillion dollars. I had forgotten this important factoid when I reached him at Intouch Capital Markets in Singapore, where he is APAC head of Fixed Income and Macro to speak about the recent stock market meltdown.
The stock meltdown started when the U.S. July jobs report came in weaker than expected with a rise in unemployment that is seen by some as a sign of recession and led.to calls for faster and bigger Fed rate cuts. It picked up steam when Asian traders figured this would strengthen yen days after the BOJ did its second rate of the year and put pressure on the popular yen carry trade. On Monday Japan’s Nikkei stock index closed down 12% after briefly posting a 20% decline, hence leading it be called Japan’s Black Monday.
Markets around the world have steadied now, however the forces that drove this market mayhem are still there, including importantly the questions hanging over the Fed, the BOJ, and global markets in general. So for starters I ask Rafael, who got well acquainted with regular intense market volatility on emerging markets trading desks back in the day in NYC, what he thinks kicked of this recent bout of stock market carnage.
”Clearly it as a good, old-fashioned emerging market-like type of unwinding trades, a bit of panic,” he says. Program trading probably also kicked in. “I’m sure a lot those things got in…stop losses in general …became an unwind of a rubber band that was just stretched a little too tight.”
As for the BOJ raising its key rate in what became a somewhat controversial move (see my recent Substack interview with Masazumi Wakatabe who told me last week the move was “premature” https://tinyurl.com/bdfcvfn6) Rafael says is was another element, “deciding to tighten rates, which gave way to another brick coming off the wall, if you will.”
”That’s where you have a confluence of different factors that led to this,” he sais. “It’s not one single thing, but it’s a collection of different points that triggered this sort of event.”
Rafael however is not blaming the BOJ for making markets vulnerable to the kind of drop that just occurred. He points to Nvidia’s CEO at a recent convention “signing T-shirts like a rock start on the T-shirt of a lady” in attendance there. He points to a person who pointed out “that might be the top of the market when you have this sort of exuberance in markets where things just stop making some sense.”
As for the markets calls for the Fed to do an emergency rate cut, and for the
BOJ to reconsider its tighter policy stance, “it’s almost a sense of entitlement…on the part of the markets to think that the central banks are there to rescue them when volatility picks up for the variety of reasons in this case.”
This includes softer earnings on the Magnificent Seven tech stocks “that’s triggering this sort lack of comfort) with investors’ positions.”
Rafael covered a lot more ground with me digging deeper into the yen carry trade’s role in the market meltdown, and where it goes next. Why he thinks the U.S. economy “is cooling down’ but doesn’t see “a recession coming to the U.S. any time soon” and what it means for the bond market.
As for calls for the Fed to move now on rates, he says when markets go through volatile times, people often want to blame central banks. “When you are trader… you want immediacy, you want to things to happen,” but that’s different from central banks’ job to be evidence driven, data dependent “versus a trader who wants to say, well if this going to happen, why aren’t you doing it today?”
Speaking of central banks, Rafael analyses the Reserve Bank of Australia’s do deliver a hawkish pause in its meeting this week, and what is likely to happen next and why it won’t be driven by the Fed but by how much improvement they see in domestic inflation.
I have tried to capture the wise, insightful views this seasoned market professional shared with me. See, hear for yourself what Rafael has to say in this fun and interesting interview.
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