The S&P 500, Germany’s DAX, and Japan’s Nikkei 225 have all rebounded from their early August lows.
According to Christopher Watling, CEO and chief market strategist at Longview Economics, this is typical pullback behavior. He explains that most pullbacks follow a three-wave pattern: an initial selloff, a relief rally that retraces some losses, and then a third wave that returns to the previous lows or falls further.
Watling also notes that safe-haven assets, such as the yen and Swiss franc, declined alongside stocks. However, his firm’s “safe havens” model still suggests potential for a shift toward these safer assets.
The key question is whether a third wave will occur and what could trigger it. Dhaval Joshi, chief strategist at BCA Research’s Counterpoint service, believes the yen carry trade and the AI bubble are intertwined and that three factors could disrupt them.
Joshi highlights how selling the yen has inflated AI stock valuations, showing a strong correlation between the yen and U.S. tech stocks.
He argues that while the yen seller might not be the same person buying AI stocks, these actions are two sides of the same trade, driven by reflexivity. The leverage for the AI bubble has largely come from borrowing yen.
Despite the Bank of Japan’s stance on maintaining low interest rates, Joshi warns the yen remains vulnerable, especially if other central banks start cutting rates. Additionally, he questions the sustainability of the AI stock euphoria, noting that only a few tech giants from the early 2000s thrived long-term, with Microsoft being a notable exception.
He believes Nvidia might not remain a dominant player in AI, and that the inflated valuations of AI stocks are at risk, especially as they’ve been bolstered by the yen carry trade.
Joshi concludes that any weakness in Japanese interest rates, the yen, or high-returning AI investments could destabilize the entire system.
