Short seller Wilson: If the Federal Reserve aggressively cuts interest rates, yen arbitrage unwinding may come back with a vengeance

The Federal Reserve's interest rate cut is undecided, and US stocks may face the risk of unwinding the yen carry trade, signaling a storm is brewing? Recently, Morgan Stanley strategist Michael Wilson believes that if the Federal Reserve cuts interest rates significantly this month, the US stock market may face the risk of further unwinding of the yen carry trade. As of May, Michael Wilson is the largest bear on Wall Street. He pointed out that if the Fed cuts rates by more than 25 basis points, it may cause the yen to appreciate, prompting yen traders to withdraw from US assets after domestic interest rates rise. This could lead to a replay of the global stock market crash that occurred in early August. "The unwinding of the yen carry trade may still be a hidden risk factor, as the rapid decline in US short-term interest rates may further strengthen the yen, prompting negative reactions in US risk assets." Due to data showing a cooling US labor market, the S&P 500 index fell again last week. Traders predict that the probability of a 50 basis point rate cut by the Fed this month has risen to about 50% currently. Meanwhile, the market predicts a total rate cut of around 115 basis points for the full year 2024, higher than the previous forecast of 108 basis points. Currently, most observers at the Bank of Japan believe that if market instability does not reappear, the Bank of Japan will raise rates again before January. This will further reverse the US-Japan interest rate differential, making US dollar assets less attractive and putting pressure on US stocks. Wilson accurately predicted the decline in US stocks in the summer. He stated that the bond market indicates that the market believes the Fed is acting too slowly in cutting rates. Now, the quality of economic data directly affects investors' confidence in the future economy, thereby impacting the stock market. If economic data continues to be weak, it will be difficult for the stock market to rise. Wilson believes that the market will continue to fluctuate before the next Fed meeting, as investors are all waiting for the Fed's policy decision