Overnight, the Japanese Nikkei 225 stock index plummeted 7.3%. It was the worst single-day loss on the index since the Fukushima nuclear disaster two years ago.
Even still, given how fast Japanese stocks have risen recently, that only takes the index back to the levels it was at on May 9.
The general sense is that traders rushing into the Nikkei recently have been doing so in a highly-levered fashion. (That’s hedge fund manager Kyle Bass’s take. Nomura currency strategist Jens Nordvig agrees, as does Société Générale strategist Sebastien Galy.)
“I would argue that the move is more about position squeeze than a broader macro concern,” says Nordvig.
“More broadly the carry trade built up over the past few months is unwinding as VaR management systems kick in with higher volatility, expect rising margin calls and the likes,” says Galy.
The bloodbath may be over for now – Nikkei futures are currently up 0.1% from the last close as of 2 PM ET.