Investors rush for the bunkers

Selling in markets around the world has intensified of late as investors flee risk and unwind carry trades, and hedge funds desperately sell assets.

"An unending chain of explosions", as Bill Jamieson puts it in Scotland on Sunday, has rocked financial markets. The MSCI World Index of 23 developed countries hit a five-year low early this week before a US-led rebound on Tuesday. This was fuelled by talk of a Japanese rate cut, which lowered the yen and eased concern over the unwinding carry trade. The main US, UK and European indices, down by around 40% this year, are near five-year lows. Emerging-market stocks fell by 15% last week. Currency markets have also been in turmoil.

Selling across all markets has intensified of late as investors have fled risk and unwound carry trades, whereby they borrowed low-yielding yen and parked the money in higher-yielding currencies or risky assets. The acceleration of deleveraging has also meant that hedge funds, partly due to restrictions on short-selling one of their key strategies are increasingly selling off assets to cover redemptions by investors and meet margin calls from lenders. These sales push down asset prices and prompt lenders to demand more collateral from leveraged investors, creating a vicious circle.

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