Big Tech sell-offs, yen trade appear connected: Strategist

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Wed, Sep 4, 2024, 8:48 AM

Kleintop advises investors to "watch the [Japanese] yen for clues on the tech trade." He notes that the trade dynamics of the yen and Big Tech are interconnected among investors, and this can be observed in the continued tech sell-off and the yen's rise Wednesday morning. Kleintop also suggests that the unwinding of the yen carry trade may not be finished and could persist throughout the remainder of 2024.

However, Kleintop says the tech sector unwind "benefits sectors that are undervalued and under-owned," recommending areas like financials (XLF), energy (XLE), and materials (XLB)

"What we're seeing is the average stock in the S&P 500, look at the equal-weighted index (^SPXEW), is outperforming the capitalization-weighted index. So we're seeing strength outside of tech, and that's been our story about the second half of the year — a broadening of the market," he tells Yahoo Finance.

00:00 Speaker A

So for more on September swings, we're going to get to Jeffrey Kleintop. He's Charles Schwab chief global investment strategist. Jeffrey, it's great to have you on here. So talk to me about how you are approaching the dip that we are seeing right now. Is this a buying opportunity for you at the moment?

00:19 Jeffrey Kleintop

Well, I think you want to watch the Yen for clues on the tech trade here. I mean, going long on tech and short on the end of been two very crowded trades in recent years, and for good reasons, the end is the cheapest funding currency in the world, meaning you can borrow cheapest in Yen, and tech's been consistently profitable. So it's not hard to imagine that a good portion of the short end trade flow has gone into US tech as a cheap source of leverage. Asset managers have borrowed nearly a trillion in Yen to invest some of that in tech stocks. So there's still a very strong link between the dollar Yen and tech stocks. We can see that even this morning with tech continuing this sell off and the Yen higher. I don't think we're completely done with this Yen carry trade unwind, though even though contracts, Yen contracts have shifted from net short to net long. We still got a lot of asset managers, which with very a lot of exposure to the end, they continue to unwind those tech stocks. I think that's going to hang over us for the remainder of the year.

01:54 Speaker A

Okay, and unwinding of tech stocks is good for what other sectors, Jeffrey?

02:00 Jeffrey Kleintop

Well, I think it benefits sectors that are undervalued and underowned. I'd look to sectors like financials, energy and materials. They're attractively valued. They're underowned and benefit from the promise of Fed rate cuts and a weakening US dollar.

02:24 Speaker A

What does that mean for you in terms of where you are finding defensiveness amid that backdrop? And I'm curious specifically about how you're thinking about the tech sell off that we've been seeing over the past couple of days here. Is that something that you think is going to define the market trade for the second half of the year here, or is that just a little bit of September seasonality?

02:50 Jeffrey Kleintop

Well, I think it's more than September seasonality. We're seeing this show up in the entire third quarter. You know, it was interesting in the second quarter, the average stock in the S&P 500 was down, while the overall index was up, and that's simply because of tech's leadership. The opposite is happening this quarter. What we're seeing is the average stock in the S&P 500, look at the equal weighted index, is outperforming the capitalization weighted index. So we're seeing strength outside of tech. That's been our story about the second half of this year, a broadening of the market. Again, focusing on sectors like financials that benefit from some of the trends we're seeing right now that may offer some defensiveness in the face of this lingering pressure on the tech sector.

03:49 Speaker A

Some continued contraction shown in the ISM manufacturing data that we saw come out yesterday, Jeff, plus we're going to get job openings labor turnover survey here today, and then, of course, the all important jobs report. This seems like a very similar setup in terms of the market reaction in early September as we saw in August. However, there's the additive of what we see in seasonality during September. How much volatility do you think that reinserts back into the equation here?

04:30 Jeffrey Kleintop

Yeah, it's certainly a risk. There are a lot of factors setting up. We've also got the looming election, right, coming up that adds more risk as we get closer there to volatility in the markets. One thing I'd say that's different is that in early August, speculators like hedge funds were net short 190,000 Yen contracts. That's their 16 billion dollars in short Yen. They were forced to close out all those trades rapidly, meaning selling off stocks like tech and buying back the end. But now they're net long 26,000 Yen contracts. There isn't the same vulnerability for a short term shock to markets and some of this weaker data. Even if the jobs report comes in softer, the jolts data today, some of the other data suggests the Fed might shift towards a 50 basis point rate cut from our expectation of a 25. Don't expect the same type of reaction. Yes, I'm still worried long term about this Yen carry trade unwind, but in very near term, the vulnerability to a shock is much lower than it was in early August.