Wednesday saw the Dow soar by 247 points: only 33 points short of making up for Tuesday’s falls. You may recall, yesterday we said there was no good reason for the sell-off in shares seen on Tuesday. And, today, we say that on Wednesday, there seems to have been no good reason for the share buying binge that took place.
One reason given was the fall in the value of the yen. The day saw the Japanese currency suffer its biggest one-day drop against the euro in three years, and the biggest fall against the dollar in two years. At the moment, investors like to see the currency of the rising sun fall in value, as a falling yen makes the carry trade more profitable. The carry trade is where investors borrow in Japan where the rate of interest is very low, and then lend money in the US and Europe where rates are much higher.
Some have argued that an apparent unwinding of the carry trade has been one the factors behind the recent drying up of credit and so conversely, a weaker yen means debts held in Japan become cheaper, making the carry trade more profitable, enabling it to wind back up again.
Another explanation put forward for yesterday’s rises in the Dow was simply that investors felt shares had become too cheap: they smelt a bargain.
At the time of writing, the FTSE 100 was picking up, and it would appear today will see rises in London mirroring the New York experience of yesterday. You may know more when you get to read this.
But it seems the best explanation for this week’s volatility is simple. It’s the end of August. Half the City is on holiday, and this is a notoriously volatile time of the year.
Readers of Investment and Business News had to suffer the agony of no issues for two weeks while we took our August break, and while any pain suffered by investors over the recent market turmoil is trivial in comparison to the suffering of our readers, it appears the real business will get under way next week. Only then will we be able to judge whether we have just witnessed a quite spectacular example of the dictum “sell in May and go away”, or whether this is something more serious.
Talking of more serious, another Hedge fund is in trouble. Cheyne Finance PLC has suffered big losses in its investment portfolio, and yesterday said, “We have been actively selling assets and reducing the size of the portfolio, and have raised sufficient cash to cover projected liabilities for the next few months.”
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