Global markets were entering their most vulnerable moment of the year, TDS senior commodity strategist Daniel Ghali notes.

Selling activity is still tied to the unwind of carry trades

“Systematic selling activity is most pronounced in equity indices and select commodities including energy markets and base metals, but the deleveraging process from risk parity & vol-control funds has thus far remained muted as melting rates still provide portfolios with a notable offset.”

“In fact, most selling activity hitting the tapes across markets is still tied to the unwind of carry trades, as opposed to a more painful and wider-spread deleveraging event. This is a self-reinforcing process as the carry trade unwind is leading to higher odds of Fed cuts, which in turn narrows the yield differential and fuels additional selling activity in carry trades.”

“However, the ongoing risk-off trading environment can still morph into a more widespread deleveraging event, should the meltdown in yields come to a halt.”