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Flight from Risk: Policymakers Losing Power to Influence Markets
Posted Oct 27, 2008 11:24am EDT by Aaron Task in Investing, RecessionWhile the Dow gets all the headlines, it continues to be a sideshow to the global market crisis that shows no signs of abating. Overnight, Japan's Nikkei tumbled to a 26-year low and Hong Kong's Hang Seng plummeted nearly 13%. Meanwhile, Europe is "on the brink of a currency crisis meltdown," according to the Telegraph, and the IMF is readying rescue plans for a number of emerging economies.
There is a global flight from risk, says Ashraf Laidi, chief currency strategist at CMC Markets U.S.
The dollar is benefiting from this search for safety but the Japanese yen is the prime beneficiary as hedge funds unwind carry trades and Japanese investors repatriate their assets. A strong yen has negative implications for Japanese exporters like Sony and Toyota, which helps explain the Nikkei's tumble.
More generally, a strong yen is a sign of investors' fear and aversion to risk. Regulators worry this could become a downward spiral that keeps financial markets and global economies in the dregs for years. Thus, the big news of the past 24 hours is the G7's attempt to stem the yen's rise by warning about its "excessive volatility'' and similar rhetoric by Japanese monetary officials.
The really big news? The yen kept on rallying early Monday, suggesting policymakers are becoming increasingly ineffective in influencing markets, something Laidi says they're overly focused on anyway.
"The more you do overkill -- concentrating solutions in a three-week period, you are going to erode the impact of these solutions," he says, which is something for the Fed to keep in mind ahead of its policymeeting this week.
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