Explanation for drop, from another board.
The problem today comes from Japan. The Nikkei has dropped by 12% in a single day, amounting to a 30% decline in one week. The Bank of Japan raised interest rates, and in its last meeting, it planned to reduce its balance sheet until 2026. All of this has caused the Yen to surge against the dollar. The issue with this is that everyone was leveraged/in debt in Yen. That is, Japanese funds, seeing how the Yen has been falling for years and interest rates in Japan are ridiculously low, were borrowing in Yen (paying low interest) and buying dollars to use those dollars to purchase assets: stocks, bonds, etc. Now that the Yen and interest rates in Japan are rising, the carry trade is no longer profitable for them. This forces them to deleverage, meaning they have to sell their dollar-denominated assets, take those dollars, and exchange them for Yen. This causes a global sell-off of assets. Additionally, there are obviously other risks, such as last Friday's terrible employment data. The Sahm Rule has been triggered; it measures the change in the unemployment rate over the last three months. When it rises above 0.5%, it usually signals a recession. The indicator has jumped to 0.53. The market is once again pricing in recession risks for the US economy, and everything happening in Japan is causing a flash crash contagion effect (rapid sell-off). Obviously, the faster it is and the higher the volatility, the sooner we can reach the climax and capitulation, but it is also very ugly. It is similar to what we saw with COVID, where we saw very sharp declines in just a few days.
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