ECB Rate Hike Exacerbates Carry Trade Unwind Risks
The week started on a positive note for Asian tech stocks after their US peers rallied on Friday due to OpenAI's GPT-6 Astra model, seen as its closest step towards Artificial General Intelligence (AGI) yet. However, European indices were weaker as energy prices rose, particularly in Europe, and mixed growth updates weighed on the region's cyclical-sector-heavy indices.
The European Central Bank (ECB) is set to deliver a 25-basis-point rate hike this Thursday to combat inflationary pressures exacerbated by Middle East-led energy price spikes. The EUR/USD advanced slightly, but mainly due to a broader US dollar retreat, as the ECB's rate hike was largely factored into the euro's valuation.
The Japanese yen saw significant appreciation on expectations that rising bond yields will convince big Japanese institutional investors to repatriate funds back home. Japan's 10-year Government Bond (JGB) yield has retreated below 2.90% after hitting 3% earlier this month, a level considered a potential trigger for these investors to bring money back.
This could lead to tens of billions of dollars in institutional Japanese money leaving US Treasuries. The concerns about a potential carry-trade unwind have not eased as US bond markets reopened with a slight rebound but still face worries about the risks associated with this event.