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Resurgent Japanese currency forces speculators to shut down years’ worth of bets that could run into trillions of dollars

The global unwinding of the world’s biggest “carry trade” has the potential to destabilise markets further, analysts have said, as the resurgent Japanese currency forces speculators to shut down bets that could run into 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, referring to the now global hunt to identify the next casualties in bond, equity and alternative asset markets around the world.

By some estimates, the yen carry trade has grown to become one of the biggest ever iterations of the bet, with the cheap fundraising in yen pouring into everything from emerging market currencies such as the Mexican Peso to Taiwanese equities, real estate and US tech stocks.

The size of the trade is very difficult to estimate, say analysts, due to its scale and use by everyone from hedge funds, through family offices and private capital, to Japanese companies.

While a chunk of the trade involves hedge funds and other short-term investors taking short positions in the yen, the long period of ultra-low rates in Japan has, for years, enticed Japanese households, pension funds, corporates and banks to look overseas for higher yields in a form of carry trade.

In a call with clients this week, James Malcolm, a global strategist at UBS, estimated the cumulative dollar-yen carry trade size built since 2011 at about $500bn, with about half of that extended during the past two to three years. He said about $200bn of those positions had been ditched over the past few weeks, or about three-quarters of the trades he ultimately expected to be unwound.

“There was a lot of irrational use of the carry trade over recent years, so it was inevitable that there would be a very big unwinding of that at some stage,” said a senior Japanese official.

According to the Bank for International Settlements, cross-border yen borrowing — not all of which is necessarily carry trades — has increased by $742bn since the end of 2021. Cross-border loans originating in Japan hit ¥157tn ($1tn) as of March 2024, up 21 per cent from 2021, according to ING analysts.

However, the recent dynamic was radically altered when the Japanese authorities intervened to strengthen the yen and then, last week, the BoJ hit the market with a surprise interest rate increase and a strong hint that there would be more tightening to come. 

Some analysts and traders suspect that the majority of the more speculative bets for which the carry trade was used have now been liquidated. Others believe there could be plenty more liquidation to come as the selling moves from hedge funds to “real money” investors.

“The reality about the yen carry trade is that nobody exactly knows how big it is, or how much has now unwound. But there is certainly a sense at this stage that some of the shakiest yen shorts that were funding speculative trades have been wiped clean,” said Benjamin Shatil, a currency strategist at JPMorgan in Tokyo. The cash-based carry trade, he said, had probably now been reduced from its extreme, “but still has some way to go”.

In a note to investors published after the BoJ’s surprise rate increase, Osamu Takashima, an currency analyst at Citi, said he believed that yen carry positions that have accumulated during the past few years were quite large not only at leveraged investors but also at long-term investors and corporates.

Predicting that “the current adjustment is only the beginning of the end”, Takashima estimated that the yen could hit ¥129 against the dollar by 2026 before hitting ¥116 the year after. It is, at present, touching ¥145.8.

Nicholas Smith, chief Japan strategist at CLSA Securities, said that “estimates for the size of the yen carry trade vary, but most suggest several trillion US dollars. In recent years, the two biggest, most consensus — hence crowded — trades globally had been short-yen and long-tech.  

“Year to date, the yen has been statistically more correlated with the Philadelphia Semiconductor index than with the [Japanese equity benchmark] Topix,” he said.

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Cybersecurity remains a white-hot space for investors. In the latest example of that demand, EQT has bought a majority stake in Acronis, a security company that specializes in data protection, cloud and integrated security solutions for managed service providers (which resell services to consumers) and corporate IT teams.

The size and value of the stake, as well as the enterprise value of Acronis are not being disclosed. EQT and Acronis say that the deal values Acronis higher than its last disclosed valuation, which was $3.5 billion, based on an investment in 2022. Some sources indicate that the actual valuation in this deal was around $4 billion.

For some context on growth, Acronis itself says that today its solutions are used by 20,000 service providers and more than 750,000 businesses. In 2022, it had said it had 5.5 million “home users” and 500,000 business customers, and in 2021, it said it had 10,000 service providers on its books. Employees now stand at 2,000, from 1,700 in 2022. Gaidar Magdanurov, Acronis’ president, told TechCrunch that the company’s cloud business’ annual recurring revenue is growing at 40%.

In 2021, the company told TechCrunch that it was profitable. It has raised more than $600 million in equity and debt over the years prior to this latest deal. Its investors include BlackRock, CVC, and Goldman Sachs.

“The founders, management, and several existing investors – including Black Rock, CVC and Springcoast – will remain as minority investors,” Magdanurov told TechCrunch. He added that its founders, Serg Bell (who used to go by Serguei Beloussov) and Stanislav Protassov, will retain a material stake in the company, too.

“Today’s announcement is great progress. It has always been important for Stanislav and myself – the founders to find a partner that aligns perfectly with Acronis’s culture and vision,” Bell said in a statement to TechCrunch. “With the amount and intensity of cyber threats constantly growing, we are confident that Acronis is uniquely placed to be the best platform for service providers to profitably protect and operate their customers’ information technology infrastructure.”

Going forwarded, he added, the two founders will focus more on another project they have, the Constructor Group, with a focus on AI and metaverse applications.

This deal is long in the making and underscores how private equity continues to be a very common exit option for enterprise technology companies at a time when the IPO window largely remains closed.

Acronis has been around since 2003, originally getting its start in Singapore before reincorporating in Switzerland. It originally started as a spinoff of Russian-founded, virtualization specialist Parallels with a focus on data recovery and backup (which turns out was actually SWsoft, which rebranded in the name of its most popular product at one point). Over the years, it has expanded into a one-stop shop of servces that include continuous data protection, cloud security, endpoint protection, patch management, anti-malware, and more. Its competitors include Commvault, Veritas and others.

Acronis will continue to operate, now with major investment from EQT behind it.

“We are thrilled to have EQT as a major shareholder to support our strategic expansion and share our vision for growth,” said Ezequiel Steiner, current CEO of Acronis, in a statement. “We would like to thank our existing investors for their support to date and are pleased that many will remain invested as we move forward. But most of all, I’d like to thank the Acronis team for their work in getting us to this stage.”

“Acronis is a strongly positioned cybersecurity and data protection software platform with a clear value proposition to Managed Service Providers,” added Johannes Reichel, partner and co-head of technology for EQT’s PE team. ” advisory team, said: “EQT has followed the company’s journey for many years and continues to be impressed by its performance and innovative strength. We are very excited to partner with Acronis, the management team and existing investors on its next phase of growth.”

Cathay Pacific announces $13bn investment to ‘get back to being very best in the world’

Airline under pressure to boost services as completion of third runway in Hong Kong nears

Cathay Pacific has announced it will spend $13bn over seven years on new aircraft, airport lounges and cabin revamps as it tries to restore its pandemic-hit reputation and regain its global premium airline crown.

Patrick Healy, chair of Hong Kong’s flagship carrier, said it was “turning the page” with “bold” plans to invest more than HK$100bn (US$12.8bn) on its fleet, cabins and airport lounges in Hong Kong, Beijing and New York, as well as other upgrades.

Cathay announced on Wednesday it would buy 30 Airbus widebody aircraft and now has more than 100 new aircraft in its delivery pipeline. It expects to launch improvements to first-class seats in 2025 and a fresh flatbed business-class product in 2026.

“We want to get back to being the very best in the world,” Healy said. “And this requires investment. We need to invest in the customer products, in the fleet . . . to be able to maintain the premium pricing position that we’ve enjoyed.”

He added that the carrier was “confident” continuing results would be “sufficient to fund the investment programme”.

Cathay has been ranked by consultancy Skytrax as world’s best airline four times, most recently in 2014. It was ranked as the world’s fifth-best airline this year.

The carrier reported a first-half profit of HK$3.6bn (US$460mn) on Wednesday, down from HK$4.3bn a year earlier. It attributed the drop principally to lower ticket prices despite “robust” demand for travel.

Cathay, which declared an interim dividend of 20 HK cents per ordinary share, said it was on track to a full post-pandemic recovery in passenger capacity by the first quarter of next year. Its Hong Kong shares closed 2.4 per cent lower.

Business travel demand, including on routes from the US to Hong Kong and mainland China, as well as leisure travel from its home market in Hong Kong were strong, the carrier said. But passenger yields — an indicator of profitability — were lower as flights were added.

It was the second consecutive year that Cathay recorded a first half-year profit, after a three-year streak of losses amid the coronavirus pandemic and Hong Kong’s tough quarantine curbs. The airline has been on a recovery path after a pilot exodus and the effects of the pandemic had tarnished its reputation.

The airline has also been under pressure from Hong Kong’s government to boost capacity and service quality as a third runway nears completion this year at its home base. Growth of Cathay’s international network would help boost Hong Kong’s status as a global aviation hub.

Rival Singapore Airlines recorded a surge in profits to S$2.7bn (US$2bn) in May for its financial year to March. But global airlines in recent weeks have warned of downward pressure on ticket prices as the two-year travel surge post-reopening shows signs of losing steam.

Healy said the lowering of airfares had so far been “fairly benign” and “manageable” in affecting profits. Cathay chief executive Ronald Lam added that short-haul prices had come down faster than long-haul, but ticket pricing and revenue for this summer were still “satisfactory”. 

JPMorgan analyst Karen Li wrote in a note last month that Cathay benefited from “healthy demand across leisure [and] business” as well as transit passengers in Hong Kong going to and from mainland China.

‘Inside Out 2’ box-office success helps movie studio turn around its fortunes

Disney’s DIS 2.49%increase; green up pointing triangle streaming and movie businesses shifted into high gear last quarter, picking up the slack from the theme-parks unit, which has begun to show signs of strain.

The entertainment giant’s streaming unit, which includes flagship platform Disney+, general entertainment service Hulu and the sports-focused ESPN+, became profitable one quarter ahead of schedule, producing operating income of $47 million on $6.38 billion in revenue, Disney said Wednesday.

Overall, Disney swung to a profit of $2.62 billion for the quarter from a loss of $460 million a year earlier, when the company took substantial restructuring and impairment charges. Revenue rose 3.7% to $23.16 billion. Both results exceeded Wall Street expectations: Analysts polled by FactSet had anticipated net income of $1.94 billion and revenue of $23.08 billion.

Disney raised its forecast for full-year growth in adjusted earnings per share to 30% from 25% and said it expects both streaming profitability and the company’s number of core Disney+ subscribers to grow in the fourth quarter.

While Disney’s quarterly streaming profit was small, the shift in that unit’s fortunes is symbolically important. Since the launch of Disney+ in November 2019, Disney has lost more than $11 billion to the streaming wars, as competition from rivals and rising content costs forced the company to spend more to produce and license TV shows, sporting events and movies than it was generating in subscription fees, quarter after quarter.

The company raised the price of its streaming offerings several times over the past couple of years, which it said helped boost subscription revenue growth. On Tuesday, Disney announced a new round of price increases for nearly all of its streaming plans, effective in October.

More eye-catching was the overall performance of Disney’s Entertainment unit, which also includes its movie studios and legacy television business.

The division that includes theatrical film releases reported income of $254 million, up from a loss of $112 million a year earlier and its first profit since early 2022.

Disney said the result was driven in large part by the strong box office performance of “Inside Out 2,” the coming-of-age animated feature produced by Disney-owned Pixar. The film opened in early June, just weeks before the fiscal quarter ended, and has since sold nearly $1.6 billion in tickets at the global box office, becoming the highest-grossing animated film of all time. The runner-up is another Disney title, 2019’s “Frozen II.”

Disney said that it expects the theatrical film division to produce a similarly sized profit next quarter, when investors will see the impact of “Deadpool & Wolverine,” from Disney-owned Marvel Studios. The film generated the highest-ever box office gross for an R-rated movie when it opened last month and has so far earned $824 million in global ticket sales.

Last year, Chief Executive Bob Iger, who returned from retirement in November 2022, said Disney’s movie studios had hit a rut and that its “performance from a quality perspective wasn’t really up to the standards that we set for ourselves.” He vowed to make fewer movies and focus more on quality.

Strong results from the entertainment unit made up for softness in the Experiences division, Iger said. “With our complementary and balanced portfolio of businesses, we are confident in our ability to continue driving earnings growth,” he said Wednesday in a statement.

The Experiences unit, which includes Disney’s six global theme-park resorts, a cruise line, consumer products sales, videogame licensing, and other businesses, saw revenue increase slightly to $8.39 billion. But operating income fell 3.3% to $2.22 billion despite steady park attendance numbers and per-visitor spending, largely because of increased costs and soft consumer demand toward the end of the quarter, the company said. Analysts polled by FactSet had expected the division to produce $2.3 billion in operating income.

Disney forecast more challenges for the theme parks business. The company said it expects operating income in the division to fall by mid-single-digit percentage points in the fiscal fourth quarter, because of continued softening of demand at its U.S. theme parks, competition for tourist dollars at Disneyland Paris from the Summer Olympics, currently being held in the French capital, and softening of demand in China.

In recent years, the theme parks business has emerged as the company’s most reliable generator of profit while other legacy businesses have declined, especially cable TV. Revenue from the division that includes theme parks has represented 30% to 40% of Disney’s overall sales for most of the past decade, but the division’s share of operating income has grown steadily, to 69% in fiscal 2023 from 39% in 2018.

This year, it became clear that the parks business was hitting some turbulence when Disney unexpectedly reported that operating income in the segment would likely be flat for the June quarter. The company said it was seeing “some normalization of post-Covid demand.”

Disney rival Comcast, which owns and operates the Universal Studios chain of parks, reported weak results in late July, mostly because of lower attendance at Universal’s domestic parks. The company said it expects lower attendance to continue into next year.

“Those Comcast numbers were scary,” said Doug Creutz, an analyst with TD Cowen. “Obviously, there’s been a slowdown in demand. Going to the parks is an expensive trip, so you’ve got to feel at least somewhat comfortable with your economic situation.”

Blaze in South Korea prompts debate over whether electric vehicles should be allowed in the country’s ubiquitous underground parking lots

SEOUL—It took just seconds for an underground South Korean residential parking lot to be engulfed in flames. The culprit: a Mercedes-Benz EQE electric vehicle that hadn’t been charging.

The blaze incinerated dozens of cars nearby, scorched another 100 vehicles and forced hundreds of residents to emergency shelters as the buildings above the parking lot lost power and electricity. Nobody died, but the fire took eight hours to extinguish.

The blaze dominated national news in South Korea. Some organizations are pushing for EVs to be parked outdoors, residents are protesting and lawmakers are proposing new safety measures.

The consternation in South Korea—home to Hyundai Motor, Kia and top battery makers – represents the latest test of faith for an EV industry dogged by safety concerns. Internal-combustion-engine cars are more likely to catch fire than EVs, according to South Korea’s national fire agency. But when EVs do burst into flames, the rechargeable lithium-ion batteries get hotter and the fire takes longer to stamp out.

In recent years, GM recalled tens of thousands of its Chevrolet Bolts in the U.S. over risk of battery fires. Hyundai pulled roughly 80,000 electric SUVs after roughly a dozen caught fire. Last September, a Nissan Leaf ignited while charging in Tennessee, and the fire required more than 45 times the water needed for a gas-powered car to be extinguished.

Automakers have grown more cautious about EV launches amid modest demand. Sales of fully electric models in the U.S. rose 6.8% through the first half of the year, according to Motor Intelligence data, a sharp deceleration from near 50% growth in 2023.

The perceived risk of EVs is particularly acute in tightly packed South Korea, a country roughly the size of Indiana with roughly 52 million people. Seoul, the capital city, has a significantly higher population density than New York or Tokyo. Roughly half of South Koreans live in the greater Seoul metropolitan area.

Outdoor residential parking lots are relatively uncommon. The nation’s ubiquitous high-rise apartments often feature underground parking, where firefighters must contend with restricted access.

The country had already been on edge about battery-related fires, following a blaze at a lithium-battery factory in late June that killed nearly two dozen people. The Mercedes EV blaze, in the port city of Incheon, occurred last week. Then, on Tuesday, a Kia EV6 caught fire in an apartment in a central South Korean town.

Mercedes-Benz said it would cooperate with local authorities to determine the cause of the fire, a local spokesman said. A Kia spokeswoman called the incident isolated and added the firm would work with authorities to determine what went wrong.

In recent days, LG Display recommended that employees at its main factory complex park their EVs outside. The country’s main international trade association, whose offices are located in central Seoul, said it would accelerate plans to relocate EV charging ports to its aboveground lot. One of the country’s largest telecommunications firms, KT, has held discussions about barring EVs from parking underground.

A South Korean lawmaker on Wednesday proposed requiring specialized fire extinguishers and equipment to be installed in areas at risk of EV battery fires. Some apartment complexes are proposing measures such as demanding EV owners sign a pledge to shoulder responsibility for any accidents.

After seeing an EV catch fire on the side of the highway earlier this year, Ha Won-jun, a 54-year-old film director in the South Korean city of Namyangju, proposed to his apartment’s residents group that the complex’s EV charging stations be relocated above ground. The suggestion has gotten minimal uptake so far. But that may now change due to the high-profile EV fire.

“Now I anticipate this to be pushed forward quickly,” Ha said.

The relative ease in finding EV-designated parking spots in South Korea had been one reason why Choi Kyung-seok bought a Kia EV6 two months ago. He also likes the fuel-cost savings. “I don’t think the risk of fire will make us forgo EVs,” said Choi, who keeps a fire blanket in his trunk.