The Impact of the End of Cheap Financing on Global Markets

Recent declines in global equity markets appear to be more related to the cessation of low-cost financing than to the U.S. economic situation, according to industry experts. 

Although the recent less encouraging than expected U.S. employment data was a trigger, it is not the main driver behind these significant fluctuations.

The most notable decline was seen on Monday in Japan's Nikkei index, which experienced its steepest daily drop since the famous Black Monday of 1987. However, analysts indicate that the real influx stemmed from the liquidation of the Japanese carry trade. In these operations, investors have been borrowing in countries with low interest rates, such as Japan or Switzerland, to invest in higher-yielding markets.

This approach backfired when the Japanese yen appreciated by more than 11% against the dollar in the past month to levels not seen in nearly four decades. "This market move is largely due to the capitulation of some positions as a number of funds found themselves betting on the wrong side," explains Mark Dowding, chief investment officer at BlueBay Asset Management.

Added to this is the surprise generated by the recent rate hike by the Bank of Japan, which has led to a reassessment of expectations about future monetary policy and has caused a pullback in stocks, particularly technology stocks in the U.S., which have been hit hard.

At Monday's close, the US Nasdaq tech index posted a decline of over 8% in August alone, highlighting a larger mismatch compared to the S&P 500 index which fell 6%. Yen cross-border lending has shown an increase of $742 billion since the end of 2021, influencing these market dynamics, according to data from the Bank for International Settlements.

The effect on hedge funds

Adjustments in the investment strategies of hedge funds, which typically finance their bets with borrowing, are intensifying market swings. According to Goldman Sachs, although gross leverage has declined, it is still near five-year highs.

In a context of stricter regulations in markets such as South Korea and China, many funds have moved their operations to Japan, increasing volatility in this market. Despite the turbulence, analysts anticipate that the adjustment of positions will be brief and do not expect a prolonged impact on the market.

Traders are adjusting their expectations and now anticipate more U.S. interest rate cuts by the end of the year, a sign that while the outlook remains uncertain, the market may be adjusting to a new economic reality without necessarily anticipating a collapse. "It is premature to fundamentally reassess the economic outlook based on market volatility alone," Dowding concludes.

"What we are seeing is a decompression of the major carry trade in history, which inevitably has some consequences," says Kit Juckes, chief currency strategist at Societe Generale.

Resilience and Challenges: Mexico's Economic Outlook in Today's Global Context

Recent analysis of fluctuations in global markets suggests that beyond momentary movements, structural factors, such as the end of cheap financing, are key to market dynamics. However, to understand how these conditions affect emerging economies such as Mexico, it is crucial to consider their strengths, opportunities, weaknesses and threats in an integrated context.

The Mexican economy benefits from significant diversification. Sectors such as manufacturing, automotive, aerospace and agribusiness are not only robust but also resilient to external shocks. This diversification is complemented by the advantage of numerous free trade agreements, such as the T-MEC, which open doors to key markets and provide substantial competitive advantages.

In addition, Mexico has a highly skilled and specialized workforce, attractive for foreign direct investment, and a constantly improving infrastructure that includes ports, airports and telecommunications networks, further strengthening its competitiveness.

The phenomenon of nearshoringThe Mexican manufacturing sector, driven by the trend of bringing supply chains closer to the United States, offers great opportunities for the Mexican manufacturing sector, allowing it to reduce costs and logistics times. Growth in the adoption of advanced technologies and digitalization in various sectors promise to boost productivity and efficiency.

In the field of renewable energies, the expansion of projects aligned with sustainability policies opens new avenues for investment and sustainable development. Likewise, support and financing programs for SMEs are essential, as they foster innovation and business growth.

However, there are significant weaknesses. The Mexican economy is highly dependent on foreign trade, especially from the U.S., which represents a risk in the event of an economic slowdown in the U.S. Bureaucracy, corruption and insecurity are obstacles that reduce efficiency and competitiveness, affecting investor perception and confidence and raising operating costs. Bureaucracy, corruption and insecurity are obstacles that reduce efficiency and competitiveness, affecting investor perception and confidence and raising operating costs. In addition, regional inequality limits inclusive growth.

Fluctuations in international markets can negatively impact exports and the local economy, adding a level of uncertainty. Changes in trade policies by strategic partners and increasing competition from other countries in key sectors are risks to Mexico's economic stability and growth. In addition, climate impacts represent a growing challenge for infrastructure and production.

In summary, while the Mexican economy faces significant challenges, its strengths and emerging opportunities offer an effective counterbalance. The ability to navigate this complex environment will depend on how both internal weaknesses and external threats are managed, thus ensuring a stable and promising economic future in the changing global landscape.

Collaboration: Editorial Auge | Reuters (International).