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Interpreting Friday's Craziness

Some snippets from today’s Financial Times lead piece. All are horrific.

Looming recession batters stocks

By Michael Mackenzie in New York and Michiyo Nakamoto in Tokyo and Song Jung-a in Seoul
Friday Oct 24 2008 12:10

Traders said the massive reversal of currency positions in favour of the yen, reflected further liquidation of the so-called “carry trade”, in which investors had borrowed at low Japanese interest rates to fund risky global investments.

. . .

The sharp rise in the yen forced further sales of risky assets, with equities, commodities and emerging markets suffering sharp declines while investors sought the safety of owning short-term government paper. Redemption requests from investors in mutual and hedge funds intensified the wave of forced selling.

. . .

“The magnitude of such historical market moves in currencies could only be the result of imploding hedge funds leading to massive liquidations,” said Ashraf Laidi, chief currency strategist at CMC Markets.

. . .

Kazuyuki Sugimoto, vice finance minister, warned that rapid and excessive currency moves were not desirable for the economy, prompting speculation that the government might intervene in the currency markets or that the Bank of Japan might cut interest rates. However, analysts said neither move would be effective.

. . .

But one thing from the print version of the same article really caught my eye:

Jack McDonald, president of Conifer Securities, a prime brokerage for small and medium-sized hedge funds said:

“Funds will only have a good idea about the actual size of redemptions towards the end of November.”

That will be something to look forward to, indeed. If we make it that far.

Read the rest of the online edition article

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