Market crash is yet to come despite tariff pause, says City veteran
A City veteran has warned that despite an apparent respite from a 90-day pause on US tariffs, markets should prepare for a significant correction in the coming days.
“I don’t think its impossible that we walk in tomorrow and the market is off in the US 15 or 20 per cent, honestly I think that’s quite possible,” James Salter, founder and chief investment officer of boutique fundhouse Zennor Asset Management, told City PM.
Salter runs Zennor’s two Japan-focused funds, and warned that the US bond market and the yen were two key indicators to watch for any upcoming market crash.
The financial markets of Japan and the US are often much more interconnected than expected, such as the recent yen carry trade unwind that caused a market dip last summer.
“I remember 1998, managing the Schroder Japan Growth Fund [now Schroder Japan Trust], and the currency moved 15 per cent in 20 minutes, and that’s what could happen,” Salter warned.
“I think the yen is going to go on a major run, we could see sterling to the yen at 160,” he added. The pound is currently worth 188 yen.
“If the yen were to do that against sterling and the dollar, the Japanese start to repatriate money back to Japan, start to sell the US bond market, you can see the whole thing feeding on itself,” Salter explained.
The government bond market seeing a rapid spike in yields was one of the key reasons for US president Donald Trump deciding to institute a 90-day pause on the sweeping tariffs he rolled out last week.
“They were getting a little bit yippy, a little bit afraid,” Trump said about the bond market yesterday evening.
Japan and tariffs
Japan’s stock exchanges have seen significant volatility in recent days, as while other markets such as the US and UK are closed, Japan is open and the most liquid market to trade futures such as for the S&P 500.
The blue-chip Nikkei 225 index has fluctuated between being down 10 per cent and up 10 per cent in the week since Trump unveiled his tariffs.
Salter also noted that despite net exports sitting at only 10 per cent of Japan’s GDP, roughly 40 per cent of sales on its markets are not denominated in yen, leaving it open to currency fluctuation.
In addition, the country’s market has a much higher exposure to cyclicality, further increasing its volatility, due to Japan’s main industries being cars, semiconductors, and electronic materials.
Salter said that since the start of the year, he had been adopting a more cautious stance to the Japanese market, due to fears around an expected fiscal tightening, tariffs, and a focus on rebuilding American manufacturing.
“If the market’s exposure to non-yen sales is maybe 45 per cent we’re probably running 18 per cent,” he said.
The fund manager said he was expecting “very severe profit warnings” from large multi-nationals like Toyota in the coming weeks, as the uncertainty of tariffs hits their bottom line by between 30 and 60 per cent.
Instead, he said that his focus on small to mid cap stocks were less exposed to export uncertainty.