Key Market Risks to Monitor in the Upcoming Half‑Year

The conditions that led to the August 2024 market shock — excessive yen carry‑trade exposure, stretched technology valuations, and high leverage — are re‑emerging. The rapid expansion of leveraged exchange‑traded funds introduces a new source of risk that can mechanically intensify both rallies and sell‑offs. Investors should monitor upcoming employment data, yen movements, and volatility indicators for early signs of deleveraging.

On a recent walk along my local waterfront, I observed a yacht named “Leverage,” a subtle reminder that many fortunes rely on borrowed capital, labor, and technology. While leverage can magnify gains, it also amplifies losses. When excessive leverage builds in a market, rapid unwinding can trigger sharp price swings and spill over to other markets, creating a butterfly effect that can transmit from Tokyo to New York. A similar unwind occurred on August 5, 2024, when Japan’s Nikkei 225 suffered its steepest one‑day decline since the 1987 “Black Monday,” prompting a 65‑point spike in the VIX and a 3 % drop in the S&P 500.

A carry trade involves borrowing at a low rate in one currency — here, the yen — and investing the proceeds in higher‑yielding assets such as U.S. Treasuries, tech stocks, or cryptocurrencies. Rapid moves in the yen or in those assets can force investors to post additional collateral or face liquidation. The Bank for International Settlements (BIS) identified several triggers for the 2024 unwind, many of which persist today. After a July 2024 hawkish rate hike by the Bank of Japan and rumors of intervention, the yen’s multi‑year decline reversed, pushing USD/JPY from near 161 to below 153. The yen now hovers near 40‑year lows against the dollar, with the Bank of Japan’s policy rate at 1 %, its highest since 1995, while Finance Minister Satsuki Katayama discussed possible intervention with U.S. Treasury Secretary Scott Bessent.

The BIS also highlighted stretched valuations in AI and technology stocks as a catalyst for the sell‑off. The PHLX Semiconductor Index has risen over 80 % since 2026, while the S&P 500 Technology sector trades near 10 × price‑to‑sales, historically high multiples. Leveraged ETFs amplify daily price movements, and their rebalancing has grown fivefold since early 2024. Retail investors are increasingly using margin and leveraged ETFs, adding hidden leverage to the market.

Recent data from the CFTC shows speculative traders holding short positions on over 146,000 yen futures contracts, the second‑most short stance since July 2024. Potential short covering could trigger rapid yen appreciation. Michael Cembalest of JPMorgan Asset Management warned that daily‑rebalancing of leveraged ETFs can magnify momentum, while strategist Nikolaos Panigirtzoglou noted signs of retreat in retail leverage across options and margin accounts, presenting a headwind for tech stocks. Margin debt has risen 54 % year‑over‑year through May, approaching levels seen before the 2000, 2007, and 2021 market peaks.

Leverage is not confined to yen carry trades or tech equities. Trader John Arnold highlighted layered leverage in the cryptocurrency ecosystem, where a 2× leveraged ETF on MicroStrategy, itself a leveraged bet on Bitcoin, can generate further leverage as its cost of capital rises. Such interconnections can snowball during an unwind, as evidenced by roughly 20 % declines in Bitcoin and Ethereum during the 2024 episode, suggesting forced margin calls across asset classes.

A modest catalyst — such as a weaker‑than‑expected non‑farm payroll report — spurred the August 2024 sell‑off, underscoring the amplifying role of thin markets and deleveraging pressures. Markets are now exhibiting similar leverage‑driven dynamics ahead of the upcoming U.S. unemployment report, which arrives ahead of a three‑day holiday weekend that may yield thin liquidity. Elevated exposure across currencies, equities, and crypto raises the risk of a cascade of forced liquidations if sentiment deteriorates. Investors should watch the employment data, yen levels, and VIX for early warning signs.

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