Unwinding.

The biggest carry trade the world has ever seen.

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1. Hamas’s elevation of the Oct. 7 attacks’ architect, Yahya Sinwar, as its leader cements the militant group’s strategic ties to Iran, signaling a united front between Tehran and its axis of militias in a conflict with Israel and the U.S. Iran has supported Hamas with funds and training in recent years, but the relationship between Tehran’s Shiite Muslim clerics and Gaza’s Sunni Muslim militants was historically fraught with tension. Tehran split with Hamas over its support for the Arab Spring in Syria and didn’t join the fighting after Oct. 7, as Sinwar and others had hoped. Inside Hamas, there was a schism over how much to trust Iran. Sinwar put to rest the debate in the hours after the previous Hamas political leader, Ismail Haniyeh, was killed in a Tehran apartment under Iranian military guard. When members of the group gathered to select a replacement, Sinwar—believed to be in hiding in a Gaza tunnel—interrupted the deliberations with a message: The new leader must be someone close to Iran. (Source: wsj.com)

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2. Several Arab countries are encouraging Iran to exercise restraint in responding to the assassination of Hamas’s political leader, Ismail Haniyeh, in Tehran last week, as fears of an unpredictable regional war expand. The diplomatic blitz, led by countries allied with the United States, came as the Biden administration was trying to lower tensions in the Middle East and renew efforts to achieve a cease-fire in Gaza. But the diplomacy also reflected concerns among some Arab countries of being dragged into a major conflict that could destabilize their economies and undermine their security. (Source: nytimes.com)

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3. The global unwinding of the world’s biggest “carry trade” has the potential to destabilize markets further, analysts have said, as the resurgent Japanese currency forces speculators to shut down bets running to hundreds of billions of dollars. Over the past three years, the yen version of the carry trade — borrowing in a low-interest-rate country to fund investment in assets elsewhere that offer higher returns — has exploded because of Japan’s ultra-low rates. A stronger yen, buoyed by last week’s Bank of Japan interest rate rise, has forced hedge funds and other investors to rapidly unwind their carry trades. This has contributed to turbulence in global markets, including a dramatic sell-off on Monday, as investors rushed to dump assets they had purchased by borrowing in yen. “You can’t unwind the biggest carry trade the world has ever seen without breaking a few heads,” said Kit Juckes, a currency strategist at Société Générale. (Source: ft.com)

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4. Mohamed A. El-Erian:

Repeatedly over the last two decades, central banks have attempted to take the difficult but necessary steps to deal with economic and financial imbalances only to fold under market pressure. The more often they concede, the higher the moral hazard and the greater they have empowered markets to demand policy changes that favor them immediately even when in conflict with the requirements of economic health. And the longer this goes on, the greater the underlying economic vulnerabilities and the larger the risk of unsettling financial instability.

The system needs a Volcker moment, one similar to the early 1980s, when as head of the Fed, he boldly sought to and succeeded in breaking an inflation’s grip on the economy, which also contaminated mindsets. What is needed now is to break the de facto ability of markets to bully central banks. (Source: bloomberg.com)