Spencer Li

The Yen Carry Trade: Unwinding and Its Global Implications

blog post thumbnail yen carry trade

blog post thumbnail yen carry trade

The yen carry trade has long been a cornerstone of global financial strategies, allowing investors to leverage Japan’s low-interest rates for higher returns abroad.

However, recent developments have put this once-reliable trade under pressure.

In this blog post, I will explain what the yen carry trade is, its historical context, the reasons behind its current unwinding, and how it will affect the various financial markets.

 

final infographics The Yen Carry Trade

What is the Yen Carry Trade?

The yen carry trade involves borrowing funds in Japanese yen, where interest rates are typically very low, and then converting these funds into a currency with higher interest rates to invest in assets that yield better returns.

This strategy exploits the differential in interest rates between Japan and other countries, allowing investors to profit from the spread. Historically, it has been a lucrative endeavor, with minimal cost for borrowing in yen and potential for significant gains in higher-yielding currencies and assets.

To elaborate, the core mechanism of the yen carry trade is based on the interest rate differential. Japan has maintained one of the lowest interest rates among developed countries, often near or at zero.

Investors borrow in yen at these low rates and convert the yen into currencies like the U.S. dollar or Australian dollar, where interest rates are higher. The borrowed funds are then invested in assets that provide higher returns, such as government bonds, corporate bonds, equities, or real estate in those higher-yielding currencies.

The profit for the investor comes from the difference between the low cost of borrowing in yen and the higher returns on the investments made in other currencies.

For example, if an investor borrows yen at an interest rate of 0.1% and invests in U.S. Treasury bonds yielding 2%, the investor earns the difference, minus any exchange rate changes. This trade is particularly attractive during periods of stable or appreciating currencies against the yen, as any gain in the target currency further enhances returns.

Historical Context

The yen carry trade gained popularity in the late 1990s and early 2000s as Japan maintained ultra-low interest rates in response to its prolonged economic stagnation. The Bank of Japan’s (BOJ) commitment to near-zero rates created a fertile ground for this strategy.

Investors flocked to borrow in yen and invest in higher-yielding assets worldwide, driving significant capital flows across global markets. This trade contributed to liquidity in financial markets and often amplified asset price movements.

In the 1990s, Japan’s economy was grappling with the aftermath of the asset bubble burst. The BOJ slashed interest rates to stimulate economic activity, making borrowing extremely cheap.

This environment catalyzed the yen carry trade, attracting global investors who could borrow yen at negligible costs. By the early 2000s, this strategy was widespread, influencing capital flows and asset prices globally.

The 2008 financial crisis marked a significant moment for the carry trade. As global markets plunged, investors scrambled to unwind their yen positions, leading to a sharp appreciation of the yen.

This episode highlighted the inherent risks of the carry trade—while it could be highly profitable in stable times, it also posed substantial risks during periods of market turbulence.

Why is the Trade Unwinding Now?

The yen carry trade is unwinding primarily due to the recent policy shifts by the Bank of Japan. For the first time in many years, the BOJ has signaled an end to its ultra-loose monetary policy by lifting its main interest rate. This move, aimed at combating inflation and stabilizing the economy, has had profound implications for the carry trade.

As Japan’s interest rates rise, the cost of borrowing in yen increases, reducing the profitability of the carry trade. Consequently, investors are beginning to unwind their positions, repaying yen-denominated debt and selling off foreign assets.

In detail, the BOJ’s decision to raise interest rates is a response to rising inflationary pressures. Japan, historically plagued by deflation, is now facing inflationary trends similar to other advanced economies.

To curb inflation, the BOJ has started to tighten its monetary policy, which includes raising interest rates. This change increases the cost of borrowing in yen, thereby diminishing the appeal of the carry trade.

As the yen appreciates, the cost of repaying yen-denominated loans increases, prompting investors to close their positions.

The rapid unwinding has created significant volatility in financial markets, particularly in assets that were popular targets of the carry trade, such as U.S. equities and emerging market currencies.

What is the Significance of This?

The unwinding of the yen carry trade is significant for several reasons.

Firstly, it signals a major shift in Japanese monetary policy, which has been a cornerstone of global financial markets for decades.

Secondly, it highlights the interconnectedness of global markets, where a policy change in Japan can ripple through to impact asset prices and capital flows worldwide. The yen exchange rate has become a key driver of global markets, indicating the profound influence of Japanese monetary policy on international financial dynamics.

This shift underscores the global dependency on Japanese monetary policy.

For years, the yen carry trade has been a source of global liquidity, supporting asset prices and economic growth in various regions. The BOJ’s policy shift not only affects Japan but also has broad implications for global financial stability.

The yen’s appreciation and the subsequent market reactions demonstrate how deeply intertwined global financial systems are, with Japan playing a pivotal role.

How Does it Affect the Markets?

The impact of the yen carry trade unwinding is already being felt across various markets.

The rapid appreciation of the yen against the U.S. dollar has caught many market participants off guard. Over the last month, the yen has surged approximately 8% against the dollar, a stark contrast from its depreciation earlier in the year. This sudden rally has triggered a sell-off in U.S. equities, as investors unwind their carry trade positions, leading to downward pressure on asset prices.

This market reaction highlights the vulnerabilities in financial markets to changes in the yen exchange rate. The appreciation of the yen increases the cost of repaying yen-denominated debt, prompting investors to liquidate assets to meet these obligations. This selling pressure has led to declines in equity prices and increased volatility in financial markets.

Deep Dive on Specific Markets

  1. U.S. Equities: The U.S. stock market has experienced increased volatility and a broad slump as the yen appreciates. The unwinding of the carry trade leads to selling pressure on U.S. equities, exacerbating declines in stock prices. This negative reaction of U.S. equity prices is an early warning of the challenges ahead.The relationship between the yen carry trade and U.S. equities is significant because many investors use borrowed yen to invest in U.S. stocks. When the yen strengthens, these investors face higher costs to repay their loans, leading them to sell their U.S. stock holdings. This selling pressure contributes to market declines and increased volatility.
  2. U.S. Government Debt: The yields on U.S. government bonds have also been affected. As investors sell foreign assets to repay yen-denominated debt, there is a shift in demand dynamics for U.S. Treasuries, influencing yields and bond prices.Typically, during periods of financial stress, U.S. Treasuries are seen as a safe haven. However, the unwinding of the carry trade can lead to complex dynamics. While some investors may flock to Treasuries for safety, others may sell them to cover their yen-denominated liabilities, leading to fluctuating yields.
  3. Global Currency Markets: The yen’s rally has had a ripple effect on other currencies, particularly those that were heavily borrowed against in carry trades. This includes higher-yielding currencies like the Australian dollar and emerging market currencies, which have seen increased volatility and depreciation against the yen.The strength of the yen affects global currency markets by altering the dynamics of capital flows. Currencies that were favored in carry trades may experience significant depreciation as investors unwind their positions. This can lead to heightened volatility and potential financial instability in countries reliant on these capital flows.
  4. Commodities: Commodity markets are also impacted as the unwinding of the carry trade affects global liquidity and risk sentiment. A stronger yen can lead to reduced commodity prices, as Japan is a significant importer of raw materials.Commodities are sensitive to changes in global liquidity and risk sentiment.The unwinding of the carry trade can reduce liquidity, leading to lower demand for commodities. Additionally, a stronger yen makes imports cheaper for Japan, potentially reducing the global prices of commodities such as oil and metals.

Concluding Thoughts

The unwinding of the yen carry trade is a pivotal development in global financial markets, driven by the Bank of Japan’s shift in monetary policy. Its effects are far-reaching, impacting equities, bonds, currencies, and commodities worldwide. As the yen appreciates, the vulnerabilities in global markets are laid bare, underscoring the interconnectedness of financial systems.

Investors and policymakers alike must navigate these changes with an understanding of the intricate dynamics at play, ensuring strategies are adapted to this new financial landscape.

Now that I have shared all about the Yen carry trade unwinding, here are some questions to ponder about:

  • How might the unwinding of the yen carry trade influence the stability and valuation of emerging market currencies that were previously beneficiaries of this strategy?
  • What potential long-term impacts could the shift in Japanese monetary policy have on global equity markets, particularly in terms of investment flows and asset allocation strategies?

Let me know your answers in the comments below.

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Spencer Li

Explaining the Debt Ceiling: What Happens in A Default?

Thumbnail Explaining the Debt Ceiling

What Is the Debt Ceiling, and What Happens If the US Defaults?

Last updated: 3 July 2026 · By Spencer Li, CFTe

The debt ceiling is the legal cap on how much the US Treasury can borrow to pay for spending Congress has already approved. When borrowing nears the cap, Congress has to vote to raise or suspend it, or the government runs out of room to pay its bills. If the ceiling is breached and the US defaults, the Treasury would have to prioritise some payments over others, interest rates would likely spike, the bond market and stock market could panic, and credit agencies could downgrade US debt. The good news: an actual default has never happened, because Congress has raised the ceiling more than 70 times since 1960, usually after some political brinkmanship and a last-minute deal. The risk that gets priced into markets is rarely the default itself. It is the uncertainty in the weeks before the deal.

Here is what the debt ceiling is, why the US debt got so big, what a real default would do, and whether the ceiling should exist at all.

What is the debt ceiling and why does it matter?

The debt ceiling is the maximum amount the US Treasury is legally allowed to borrow to meet obligations the government has already committed to.

The mechanics are simpler than the headlines suggest. The government raises money through taxes and other revenue. When spending runs ahead of revenue, you get a gap. That gap is bridged by borrowing, which adds to the national debt. But the borrowing is not unlimited. Congress sets a legislative cap on it, and that cap is the debt ceiling.

When the debt nears the cap, Congress has to step in and either suspend or raise it, which gives the Treasury permission to keep borrowing. That back-and-forth between spending, borrowing, and a legislative vote is the whole debt ceiling drama in one sentence.

Do note that, the ceiling does not authorise new spending. It authorises borrowing to pay for spending Congress already voted for. That distinction is the source of most of the confusion in the news cycle.

Where did the debt ceiling come from?

The debt ceiling is not a recent invention. It dates back to 1917, when Congress created it to set an upper limit on how much federal debt the US government could pile up.

It has not stayed put. As the economy grew and the government’s financial commitments grew with it, the ceiling has been raised many times. Congress has lifted the bar more than seventy times since 1960, and each hike signalled a fresh need for borrowed funds. By the early 2020s, both the national debt and the ceiling sat above $31 trillion.

Why is the US debt so high?

The US national debt is the product of several forces stacking on top of each other over decades: tax cuts that lowered revenue, sustained overspending, expensive crises, and large mandatory programmes. Between 2009 and 2023, the national debt nearly tripled.

Here are the main drivers:

  • Tax cuts that reduced revenue. Major tax cuts, from the Reagan-era cuts in the 1980s through the cuts under the Trump administration, lowered federal revenue. They were aimed at stimulating growth, but the side effect was less money coming in.
  • Government overspending. Long military campaigns, such as the wars in Iraq and Afghanistan, carried huge immediate costs plus long-term obligations like veterans’ healthcare and disability benefits.
  • Crisis spending. The 2008 recession forced enormous spending to rescue failing institutions. The Covid-19 pandemic forced massive stimulus to support businesses and individuals. Both strained the budget further.
  • Mandatory programmes. Social Security, Medicare, and Medicaid are a large, growing share of the budget, driven up by an ageing population and rising healthcare costs.
  • Defence. The US spends more on its military than any other country, which is a substantial slice of total expenditure.

No single cause explains the debt. It is the sum of all of these, compounding over time.

What happens if the debt ceiling is breached?

If the US fails to raise the ceiling in time and defaults on its obligations, the consequences are severe and spread well beyond Washington. Here is what would likely unfold.

The government has to prioritise payments. With the law mandating that programmes like Social Security and Medicaid continue, the Treasury would be forced to decide what gets paid and what gets delayed, potentially suspending programmes people rely on.

Interest rates spike. The bond market reacts before any formal default, with yields on short-term debt moving as default risk rises. That can feed through to higher mortgage rates and borrowing costs for households and businesses. Even a brief default could leave the government paying more to borrow afterwards.

Markets panic. A breach could trigger turmoil reminiscent of the 2008 stock market crash. As bondholders sell and rates whip around, the volatility can destabilise markets, made worse by the fact that the US has never actually defaulted, so nobody knows exactly how it plays out.

A run on money market funds. As seen in 2008, a default could spark a run on money market accounts. If a large fund halts redemptions, the panic deepens and may need government intervention to stabilise.

Political instability. Around election seasons, the debt ceiling becomes a partisan weapon, with each side accusing the other of mismanagement. Everyone agrees a default is bad, but how far each side will bend in negotiations is never certain until the deal lands.

Lasting damage to US standing. A default could prompt credit agencies to permanently downgrade US debt, weakening America’s global standing and even challenging the US dollar’s status as the world’s reserve currency. The probability of an actual default has historically been estimated as low, but the potential damage is what makes it a serious concern, especially heading into a slowdown.

What options does the government have to avoid default?

When the Treasury hits the ceiling, it can deploy a set of “extraordinary measures” (accounting manoeuvres that free up borrowing room) to put off an immediate default. These include suspending the issuance of certain types of debt and redeeming existing investments inside civil service retirement funds.

These measures are a buffer, not a fix. They buy time for Congress to negotiate, like a financial fire drill. But they are limited in size and duration. They can only defer the default. If Congress does not raise or suspend the ceiling in time, the buffer runs out.

Do other countries have a debt ceiling?

Mostly, no. The US version is unusual. A few countries have a statutory borrowing limit, but they set it so high it is never a constraint, or they removed it entirely after it caused too much trouble. Here is how three approaches compare.

CountryHas a debt limit?How it worksCauses political crises?
United StatesYesHard cap that must be raised or suspended by Congress when debt approaches itYes, recurring brinkmanship and near-defaults
DenmarkYes (in name)Statutory limit set deliberately far above actual borrowing needs (around 950 billion DKK, roughly $150 billion USD as of 2021)No, the cap is so high it is never binding
AustraliaNo (abolished 2013)Had a US-style limit, scrapped it after political crises in the early 2010s; now governed by normal budget processesNo, removing it ended the standoffs

Denmark keeps a limit but sets it so far above its needs that it never becomes a flashpoint. Australia had a US-style cap, hit the same brinkmanship the US sees, decided the limit was causing more harm than good, and abolished it in 2013. Since then, Australia’s borrowing has been governed by ordinary budget processes and parliamentary checks rather than a fixed cap. The lesson from both: a debt limit can work as a theoretical safeguard, but only if it is designed so it does not become a source of political contention.

Should the debt ceiling be revoked?

There are two honest sides to this.

In favour of keeping it: the ceiling gives Congress a recurring checkpoint to evaluate the nation’s financial health. Supporters argue this process, contentious as it is, encourages fiscal responsibility and stops unchecked borrowing.

Against keeping it: critics say the ceiling is a relic that fits poorly with a modern economy. They argue it causes needless economic disruption and has become a tool for political brinkmanship rather than genuine fiscal discipline. The recurring crises expose the US to self-inflicted financial wounds and dent its credibility.

A growing number of economists favour reform, ranging from linking the ceiling directly to spending levels (so a separate vote is not needed) to abolishing it outright, which would bring the US in line with most developed countries.

Personally, I do not have a vote in Congress, and as a trader I do not need one. My job is not to be right about whether the ceiling should exist. It is to be positioned for either outcome and to not get shaken out by the noise in between.

How should a trader handle a debt ceiling standoff?

Treat it as a known, scheduled source of volatility, not a reason to predict the headline.

Every debt ceiling fight follows roughly the same arc: a deadline looms, the rhetoric escalates, markets get jumpy, and then a deal arrives close to the wire. The default itself has never happened. That does not mean it never will, but it does mean the tradeable event is almost always the uncertainty before the deal, not the catastrophe everyone fears.

A news feed will scream “DEFAULT” at you on a loop. It will not tell you whether the move is already priced in, how to size a position when volatility is elevated, or whether to simply stand aside until the setup is clean. That judgment is the first of the Five Edges a machine cannot trade for you. The headline is the easy part. Knowing what to do with it is the edge.

So when the next standoff hits, the question is not “will they default?” The question is “what does my system tell me to do right now, and am I sized so a fake panic cannot hurt me?”

FAQ

What is the debt ceiling in simple terms?
It is the legal limit on how much the US Treasury can borrow to pay for spending Congress has already approved. When borrowing nears the limit, Congress must vote to raise or suspend it, or the Treasury runs out of room to pay the government’s bills.

Has the US ever actually defaulted on its debt?
No. The US has never defaulted because of the debt ceiling. Congress has raised or suspended the ceiling more than seventy times since 1960, usually after political brinkmanship and a last-minute deal.

What would happen to the stock market if the US defaulted?
A default could trigger a market panic similar to 2008: bondholders selling, interest rates spiking, possible runs on money market funds, and a credit downgrade of US debt. Even the threat of default tends to raise volatility before any deal is reached.

Does the debt ceiling control how much the government spends?
No. The debt ceiling does not authorise new spending. It only authorises borrowing to pay for spending Congress has already voted for. That is why a fight over the ceiling is about paying existing bills, not approving new ones.

Do other countries have a debt ceiling like the US?
Most do not. Denmark keeps a statutory limit but sets it so high it is never binding, and Australia abolished its limit in 2013 after it caused repeated political crises. The US hard-cap model that forces recurring votes is unusual among developed nations.

So, two questions worth sitting with. First, given the damage a real default would do, should the debt ceiling mechanism be reconsidered? Second, if it is kept, how do we stop the political fights around it from harming the economy it is meant to protect? Let me know in the comments.

If you want the bigger picture on how macro headlines move markets, read the pillar: Macro and Market Cycles: A Trader’s Guide.

Want a calmer way to trade the noise? Grab the free 15-Minute Swing Trading Starter Kit. It is the exact routine I use to scan once a day and trade any market in 15 minutes, headlines or no headlines.

About the author. Spencer Li is the founder of Synapse Trading and a Certified Financial Technician (CFTe) with 15 years of trading across stocks, forex, crypto, commodities, and bonds. His trade log is public, 404 trades, losses left in. He teaches low-risk swing trading in 15 minutes a day, one system for any market.

Education, not financial advice. Synapse Trading is not licensed by MAS to advise on investment products. Trading carries risk of loss; past performance is not indicative of future results.

Related

Macro and Market Cycles (pillar) · How interest rates move markets · Trading market crashes and panics

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Spencer Li

What is the Best Investment During a Recession?

Thumbnail What is the Best Investment During a Recession

Best Investments During a Recession: Where to Put Your Money in a Downturn

Last updated: 3 July 2026 · By Spencer Li, CFTe

The best investments during a recession are defensive, cash-flow-stable assets that hold up when growth stalls: high-quality government bonds (like US Treasuries), defensive stocks (utilities, healthcare, consumer staples), gold, and well-timed real estate. History backs this. In the 2008 to 2009 Great Recession, the US Treasury bond market gained 12.7% as investors fled to safety, gold rose more than 25%, and the healthcare sector held up far better than the broad market while the S&P 500 fell roughly 56% from its October 2007 peak. The common thread is simple: in a downturn, money moves from things that need growth to things that survive without it. No asset is truly recession-proof, so the real job is diversification and position sizing, not finding one magic ticker.

Here is what a recession actually is, the early warning signs to watch, how it hits each market, and where the safer money tends to go.

What is a recession?

A recession is a period of economic decline marked by falling Gross Domestic Product (GDP, the total value of goods and services an economy produces), rising unemployment, and shrinking consumer and business spending.

It is usually triggered by a mix of factors, not a single one. A drop in demand, a supply shock, a financial crisis, or an external event can all start the slide, and they often compound each other.

To fight a recession, governments and central banks lean on monetary and fiscal policy: cutting interest rates, raising government spending, and offering tax incentives to restart growth. The damage can outlast the downturn itself, showing up as higher poverty, tighter credit, and lower consumer confidence.

What causes a recession?

Recessions rarely have one clean cause. These are the usual suspects, often several at once:

  • Tight monetary policy. When the central bank raises interest rates to control inflation, borrowing and spending fall, which can tip the economy into contraction.
  • Bursting asset bubbles. A speculative run-up in real estate or stocks that suddenly reverses can drag the whole economy down with it.
  • External shocks. Natural disasters, wars, or pandemics can disrupt activity fast.
  • Fiscal policy. Sharp changes in government spending or taxation can cool the economy.
  • Supply shocks. A sudden jump in a key input, like a major oil price spike, can choke growth.
  • Banking crises. When banks stop lending, investment and activity seize up.
  • Trade imbalances. Large imbalances or protectionist policies can disrupt international trade enough to cause a downturn.

What are the early warning signs of a recession?

No single indicator predicts a recession with certainty. But a handful of signals tend to flash before the downturn arrives, and they matter more when several show up together.

Warning signWhat it means
Inverted yield curveShort-term bonds yield more than long-term bonds, a sign investors have lost confidence in the long-term outlook
High debt levelsHouseholds, companies, or governments carrying excessive debt that gets hard to sustain
Slowing job growthHiring stalls or unemployment starts rising, an early tell that the economy is weakening
Falling consumer spendingPeople cut back, signalling lower confidence and softening demand
Stock market declineA sharp, sustained drop suggests investors are worried about what is coming

The inverted yield curve (when short-term interest rates rise above long-term rates) is the one most analysts watch, because it has preceded most modern US recessions. None of these is a guarantee. Read them as a cluster, not a crystal ball.

How does a recession affect the financial markets?

A recession ripples through every major market, and not always in the same direction. Here is how it has played out historically.

  • Stocks decline. Markets fall as investors turn pessimistic. In the 2008 recession, the S&P 500 dropped around 56% from its peak in October 2007 to its low in March 2009.
  • Bonds rally. As stocks fall, money moves into safer bonds, pushing bond prices up and yields down. The 10-year US Treasury yield fell from around 4% in mid-2007 to below 2% by the end of 2008.
  • Currencies can devalue. If investors lose faith in a country, its currency can drop. During the late-1990s Asian financial crisis, the Thai baht lost around 50% against the US dollar and the Indonesian rupiah lost around 80%.
  • Commodities fall. Demand for oil, copper, and similar inputs drops with activity. In 2008, oil fell from around $145 a barrel in July to roughly $30 by December.

Not every recession hits the markets the same way, and there is wide variation in how individual sectors and asset classes hold up. That variation is exactly why the asset class you choose matters.

What is the best asset class to invest in during a recession?

During a downturn, investors look for safe havens that can ride out the storm. Four asset classes have historically done that job, each with a real example from the 2008 to 2009 Great Recession.

Asset classWhy it holds up2008 to 2009 example
Government bonds (e.g. US Treasuries)Considered among the safest assets; benefit from the flight to safetyUS Treasury bond market gained 12.7% as investors flocked to safety
Defensive stocks (utilities, healthcare, staples)Sell essentials people buy in any economy, so earnings are steadierS&P 500 healthcare sector was one of the few that did not decline as much
GoldTraditional safe haven that tends to do well in uncertaintyGold rose more than 25% as investors sought protection
Real estateLow rates and lower prices create entry points for long-term holdersHousing prices fell sharply, but had rebounded and were rising again by 2012

A few honest caveats. Bonds and gold are defensive, not magic; they can lag badly once the recovery starts. Real estate is the slowest to turn and the hardest to exit in a panic, so it rewards patience and a long horizon, not a quick flip. And no asset here is fully recession-proof. Every one of them carries risk.

That is why the answer is not a single ticker. It is a diversified mix, sized so that no one position can sink you, matched to your own risk tolerance and time horizon.

Where the human edge comes in

A screener can rank every defensive sector for you in a second, and a model can plot the yield curve and tell you it just inverted. That part is basically free now. What the machine will not do is tell you how much of your portfolio to actually move, when to stop buying the dip because your sizing is already stretched, or whether you have the temperament to hold a falling asset through the worst of it. The data is the easy part. Knowing how much to commit and when to sit on your hands is the judgment, and that is the first of the Five Edges no algorithm trades for you.

How to prepare your portfolio before a recession

You do not have to predict the exact top to be ready. A few steps go a long way:

  • Diversify across asset classes, so a hit to one market does not take out the whole portfolio.
  • Hold some cash and high-quality bonds, which give you both stability and dry powder to deploy when prices are low.
  • Know your risk tolerance and time horizon before the stress hits, not during it. Decisions made in a panic are almost always worse.

If you want a repeatable way to read market conditions and size positions instead of reacting to headlines, that is exactly what a tested system is for.

FAQ

What is the safest investment during a recession?
High-quality government bonds, such as US Treasuries, are generally considered among the safest. In the 2008 to 2009 Great Recession, the US Treasury bond market gained 12.7% as investors moved money into safety.

Does gold go up in a recession?
Often, yes. Gold is a traditional safe haven and tends to do well during economic uncertainty. During the 2008 to 2009 recession, gold prices rose more than 25%. It is not guaranteed, though, and gold can lag once a recovery begins.

Is real estate a good investment during a recession?
It can be for long-term investors, because interest rates tend to be low and property prices may fall, creating entry points. In 2008 to 2009, housing prices dropped sharply but had rebounded by 2012. Real estate is slow to turn and hard to exit quickly, so it rewards patience.

What are the early warning signs of a recession?
The most-watched signals are an inverted yield curve, high debt levels, slowing job growth, falling consumer spending, and a declining stock market. No single one is decisive; they are most reliable when several appear together.

Is any investment fully recession-proof?
No. Every asset class carries some risk, and recessions do not all behave the same way. The practical defence is diversification and position sizing matched to your own risk tolerance, not a single “safe” asset.

Now that you know where the safer money tends to go, the harder question is how much of your portfolio to actually move, and when. How are you preparing for the next downturn? Let me know in the comments.

And if you want the bigger picture of how to build a portfolio that survives any market cycle, read the pillar: The Beginner’s Guide to Investing and Trading.

Want a system instead of a reaction? Grab the free 15-Minute Swing Trading Starter Kit. It’s the exact routine I use to read market conditions and trade any market in 15 minutes a day.

About the author. Spencer Li is the founder of Synapse Trading and a Certified Financial Technician (CFTe) with 15 years of trading across stocks, forex, crypto, commodities, and bonds. His trade log is public, 404 trades, losses left in. He teaches low-risk swing trading in 15 minutes a day, one system for any market.

Education, not financial advice. Synapse Trading is not licensed by MAS to advise on investment products. Trading carries risk of loss; past performance is not indicative of future results.

Related

The Beginner’s Guide to Investing and Trading (pillar) · How to build a diversified portfolio · Safe haven assets explained · How to read the yield curve

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Spencer Li

The Different Types of Oil Products & What Affects their Prices?

Thumbnail The Different Types of Oil Products What Affects their Prices

Oil Products and Oil Prices: What Moves the Oil Market (and How to Trade It)

Last updated: 3 July 2026 · By Spencer Li, CFTe

Oil prices move because oil is priced by global supply and demand, and a short list of forces keeps shifting both sides of that balance: OPEC production decisions, geopolitical events, economic growth, government policies, inventory levels, natural disasters, and the U.S. dollar. When supply falls or demand rises, prices go up. When supply floods or demand collapses, prices fall. “Oil” is not one thing either. It trades as several regional benchmarks (Brent, WTI, Dubai, Urals, Oman, Tapis), and you can get exposure through futures, options, ETFs, OTC derivatives, and oil-linked bonds and notes. OPEC matters because its members together pump roughly 40% of the world’s oil, so when they cut or raise output, the whole market feels it.

Here is the full picture: the oil products you can trade, the financial products that give you exposure, what OPEC actually does, and the seven factors that move price, each with a real historical example.

What are the different oil products?

There are several types of crude that trade as benchmarks in global markets. Each is priced a little differently because of its density (light or heavy), its sulfur content (sweet means low-sulfur, sour means high-sulfur), and where it is produced. Lighter, sweeter crude is cheaper to refine, so it usually commands a higher price.

BenchmarkTypeSourceUsed to price
Brent CrudeLight, sweetNorth SeaAbout two-thirds of the world’s internationally traded crude
WTI (West Texas Intermediate)Light, sweetUnited StatesCrude oil in North America
Dubai CrudeLight, sourUnited Arab EmiratesCrude oil in the Asian market
Urals CrudeHeavy, sourRussiaCrude oil in Europe
Oman CrudeMedium, sourOmanCrude oil in the Middle East
Tapis CrudeLight, sweetMalaysiaCrude oil in the Asia-Pacific region

These are some of the most widely traded grades, and their prices are often used as a benchmark to price other types of crude. Brent and WTI are the two you will see quoted most. The specific characteristics of each grade (density, sulfur content, refining cost) drive its price and demand.

What are the financial products for trading oil?

You do not need a tanker to get exposure to oil. Several financial products track or hedge the oil price:

  • Futures contracts. Agreements to buy or sell a set quantity of oil at a fixed price on a future date. These trade on exchanges such as the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).
  • Options contracts. Similar to futures, but the buyer gets the right, not the obligation, to buy or sell oil at a set price on a future date.
  • Exchange-Traded Funds (ETFs). Investment products that track the oil price by holding a basket of related securities, giving you exposure without owning the physical commodity.
  • Over-the-Counter (OTC) derivatives. Customized contracts negotiated privately between two parties, not traded on an exchange. Big oil companies and financial institutions use these to hedge against price moves.
  • Commodity-linked bonds. Bonds issued by oil companies or governments, linked to the oil price, giving exposure through a debt instrument.
  • Oil-linked exchange-traded notes (ETNs). Debt securities that track the oil price.

These let individuals and institutions get exposure to oil, or hedge against price swings. Do note that, each product carries its own terms, conditions, and risks. Understand them before you put money in. A futures contract and an ETF can both be “long oil” and behave very differently over the same month.

What is OPEC and what role does it play?

OPEC stands for the Organization of the Petroleum Exporting Countries. It is a group of oil-producing nations, including Saudi Arabia, Venezuela, Iran, and Iraq, founded in 1960 and headquartered in Vienna, Austria. (Membership has shifted over the years, so check the current count when you read this.)

OPEC’s job is to coordinate and unify its members’ oil production and sales policies. The aim is to regulate supply, keep prices stable, and ensure a fair return for oil-producing countries.

Here is why it matters to price. OPEC members together produce about 40% of the world’s oil, so by coordinating their output they can move global supply, and therefore price. If OPEC agrees to cut production, supply drops and prices tend to rise. If it agrees to raise production, supply grows and prices tend to fall. Those decisions ripple through the global economy and the budgets of every country that imports oil, which is exactly why OPEC’s meetings draw so much attention, and so much criticism.

Which factors affect oil prices?

Several forces move the oil price. Most of them work by changing one side of the supply-and-demand balance. Here they are, each paired with a real historical example of it in action.

FactorHow it moves priceReal example
Supply and demandHigh demand plus low supply lifts price; the reverse drops itThe 2008 global financial crisis crushed demand while supply stayed high, and the oil price fell sharply
Geopolitical eventsConflict in producing regions disrupts supply and spikes priceThe 1990 Gulf War disrupted Middle East production and transport, pushing prices sharply higher
Economic growthGrowing economies burn more oil, lifting demand and priceChina’s rapid growth in the early 2000s drove up oil demand and price
Government policiesTaxes, subsidies, and sanctions shift supply or demandThe 2018 sanctions on Iran cut its oil supply and pushed prices up
Inventory levelsHigh storage means lower prices; low storage means higherThe 2020 COVID-19 demand collapse filled storage, and the oil price dropped
Natural disastersStorms and quakes disrupt production and transport, spiking priceHurricane Harvey in 2017 hit Gulf of Mexico production, spiking prices
Currency exchange ratesOil is priced in U.S. dollars, so a weaker dollar tends to lift the priceThe early-2000s dollar depreciation raised the oil price for non-dollar buyers

A pattern worth noticing in those examples: every price move also moved the traders. A supply disruption did not just raise price, it pulled in speculators buying futures in anticipation of more upside. A demand collapse did not just lower price, it triggered selling as traders cut their oil exposure. Price moves the fundamentals, and the fundamentals move the crowd, and the crowd moves price again. That feedback loop is most of what you are actually trading.

Keep in mind this is not the complete list. The oil market is complex, and plenty of other forces, internal and external, feed into the price.

How do you actually trade oil with all this going on?

Honestly, you do not need to forecast OPEC’s next meeting or model the dollar to trade oil well. That is the trap most beginners fall into. They try to out-analyze the entire energy complex, freeze, and never take a trade.

Personally, I trade oil the same way I trade everything else: as a chart. All of these factors, supply, demand, OPEC, the dollar, the next hurricane, are already being priced in by the market in real time, and they show up as the structure on the chart. My job is not to predict the news. My job is to read what price is doing, find a low-risk entry, size it properly, and manage the risk if I am wrong.

Here is where the human edge comes in. An AI or a news feed can summarize every oil factor above for you in a second. That part is now free. What it will not do is tell you that the fundamentals are screaming “buy” while the chart is quietly rolling over, or stop you from over-sizing a volatile commodity because the story felt so convincing. The information is the easy part. The judgment to act on it, or to stand aside, is the part worth learning, and it is the first of the Five Edges an algorithm cannot trade for you.

FAQ

What is the difference between Brent and WTI crude oil?
Both are light, sweet crude oils used as benchmarks, but Brent is extracted from the North Sea and prices about two-thirds of the world’s internationally traded crude, while WTI (West Texas Intermediate) is produced in the United States and is the benchmark for North American crude.

Why do oil prices change every day?
Because oil is priced by global supply and demand, and a handful of forces keep shifting both sides: OPEC production decisions, geopolitical events, economic growth, government policies, inventory levels, natural disasters, and the strength of the U.S. dollar.

How does OPEC affect oil prices?
OPEC members together produce about 40% of the world’s oil, so when they coordinate to cut production, supply drops and prices tend to rise, and when they raise production, supply grows and prices tend to fall.

How can I invest in or trade oil?
You can get exposure through futures contracts, options, oil ETFs, OTC derivatives, commodity-linked bonds, and oil-linked ETNs. Each tracks the oil price differently and carries its own risks, so understand the product before you commit.

Does a weaker U.S. dollar raise oil prices?
Generally yes. Oil is priced in U.S. dollars, so when the dollar weakens, oil becomes cheaper for buyers using other currencies, which tends to lift demand and the price.

So, will you consider adding an oil product to your portfolio, and how do you think the rise of renewable energy will reshape the oil market in the years ahead? Let me know in the comments.

And if you want the broader picture of how commodities fit alongside stocks, forex, and bonds, read the pillar: The Beginner’s Guide to Commodity Trading.

Want a simple way to trade any market, including oil? Grab the free 15-Minute Swing Trading Starter Kit. It’s the exact routine I use to scan once a day and trade any market in 15 minutes.

About the author. Spencer Li is the founder of Synapse Trading and a Certified Financial Technician (CFTe) with 15 years of trading across stocks, forex, crypto, commodities, and bonds. His trade log is public, 404 trades, losses left in. He teaches low-risk swing trading in 15 minutes a day, one system for any market.

Education, not financial advice. Synapse Trading is not licensed by MAS to advise on investment products. Trading carries risk of loss; past performance is not indicative of future results.

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Spencer Li

What is Supercore Inflation and How to Trade it?

Thumbnail What is Supercore Inflation

The Federal Reserve in the US is now using “supercore inflation” to guide interest-rate policy.

This narrow measure of inflation comprises the prices of services (e.g. barbers, lawyers, plumbers) excluding housing and energy prices.

The Fed is paying close attention to services as they tend to be driven by the cost of labor, which the Fed can more easily control with interest rates, whereas the price of goods are more affected by global factors.

The focus on supercore is expected to affect the Fed’s decisions on interest rate increases.

In this blog post, we will delve into the origin, calculation, and key numbers of supercore inflation, and explain how this data is relevant to you as a trader or investor.

 

Infographic What is Supercore Inflation and How to Trade it

 

What is Supercore Inflation and its Origin?

Supercore inflation is a concept in economics that refers to a persistent increase in the prices of goods and services that are considered necessities for a particular population.

It is often used to describe situations where the prices of essential goods, such as food, healthcare, and housing, increase faster than overall inflation.

The origin of the concept of supercore inflation is not well documented, but it is believed to have emerged in the late 20th century as a way to describe the experience of populations in developing countries who were facing rapid increases in the cost of living, particularly for essential goods and services.

The concept is used to highlight the disproportionate impact of inflation on low-income households and to highlight the need for economic policies that address these issues.

How is the Data Calculated?

The data for supercore inflation is typically calculated by measuring the change in prices of a basket of goods and services that are considered essential for a particular population.

This basket is created based on a survey of household spending patterns and may include items such as food, housing, healthcare, transportation, and education.

The change in the prices of these items is then compared to the overall rate of inflation to determine whether prices are rising faster or slower for essential goods and services.

To calculate supercore inflation, national statistical agencies typically use consumer price indices, which are measures of changes in the prices of a basket of consumer goods and services over time.

The basket of goods and services used in consumer price indices is updated periodically to ensure that it reflects the current spending patterns of households.

The calculation of supercore inflation can also be done by private research institutions, think-tanks or economists, who use the same data sources as national statistical agencies and may use slightly different methodologies to arrive at their results.

The goal of calculating supercore inflation is to provide a more nuanced understanding of the impact of inflation on different segments of the population.

What are the Key Numbers Measured?

In measuring supercore inflation, several specific numbers are typically looked at, including:

  • Personal Consumption Expenditures Price Index (PCE): This measures the prices of goods and services in the US economy.
  • The rate of change in prices of essential goods and services: The rate at which prices of the basket of essential goods and services are increasing or decreasing is an important indicator of supercore inflation.
  • The comparison with overall inflation: The difference between the rate of increase in the prices of essential goods and services and the overall rate of inflation is a key metric in determining supercore inflation. If the rate of increase in the prices of essential goods and services is higher than the overall rate of inflation, it is considered an instance of supercore inflation.
  • The impact on low-income households: The extent to which supercore inflation is affecting low-income households is another key metric. This is often determined by comparing the rate of increase in the prices of essential goods and services for low-income households with the rate of increase for higher-income households.
  • The duration of the increase: The length of time over which the prices of essential goods and services have been increasing faster than overall inflation is another important metric in determining supercore inflation.

By looking at these specific numbers, economists and policymakers can gain a better understanding of the impact of inflation on different segments of the population and can develop policies to address the effects of supercore inflation on low-income households.

How is this Data Relevant to Traders and Investors?

The data on supercore inflation is relevant to traders and investors because it can provide valuable insights into the current state of the economy and can help inform investment decisions.

Understanding trends in supercore inflation can help traders and investors anticipate changes in consumer behavior, interest rates, and monetary policy, which can all have a significant impact on financial markets.

For example, if supercore inflation is rising faster than overall inflation, it can signal that consumers are facing increasing financial pressures and may be more likely to reduce their spending on discretionary items.

This, in turn, can affect the demand for certain goods and services and may lead to changes in their prices.

Investors may also use data on supercore inflation to make decisions about investing in specific industries or sectors.

For example, if supercore inflation is affecting the prices of essential goods such as food, healthcare, and housing, it may be a sign that companies in these industries are poised for growth, and investors may want to consider investing in them.

Furthermore, trends in supercore inflation can also impact interest rates, which can have a significant impact on bond prices.

If supercore inflation is rising, central banks may raise interest rates in an effort to control inflation, which can have a negative impact on bond prices.

Hence, data on supercore inflation can provide traders and investors with valuable insights into the current state of the economy, and they need to be aware of these trends and take them into account when making investment decisions.

News Trading on Supercore Inflation Data

Here are some specific examples of how traders might use each of the data points from the supercore inflation report to make trading decisions:

  • The rate of change in prices of essential goods and services: Traders can use the rate of change in the prices of essential goods and services to assess consumer spending patterns. If the prices of essential goods and services are increasing rapidly, it may signal that consumers are under financial pressure and are reducing their spending on discretionary items, which could negatively impact certain industries or sectors.
  • The comparison with overall inflation: Traders can use the difference between the rate of increase in the prices of essential goods and services and the overall rate of inflation to assess the health of the economy. If the rate of increase in the prices of essential goods and services is higher than the overall rate of inflation, it may signal that the economy is facing challenges and that consumer confidence is declining. This could negatively impact financial markets and lead to a decrease in stock prices.
  • The impact on low-income households: Traders can use the data on the extent to which supercore inflation is affecting low-income households to anticipate changes in consumer behavior. If low-income households are facing increasing financial pressure, they may reduce their spending, which could negatively impact certain industries or sectors. Traders may also use this data to identify potential investment opportunities in companies that serve low-income households, such as food and healthcare companies.
  • The duration of the increase: Traders can use the length of time over which the prices of essential goods and services have been increasing faster than overall inflation to assess the sustainability of the trend. If the trend has been in place for a prolonged period of time, it may signal that the increase in the prices of essential goods and services is likely to persist, which could negatively impact financial markets and lead to a decrease in stock prices.

By understanding the trends in supercore inflation and the factors driving these trends, traders can make more informed investment decisions and maximize their returns.

Concluding Thoughts

In summary, supercore inflation is a valuable data point to keep an eye on if you are a trader or investor.

This narrow measure of inflation, which focuses on the prices of services excluding housing and energy prices, is gaining prominence as the Federal Reserve in the US uses it to guide interest-rate policy.

By tracking trends in supercore inflation, you can gain valuable insights into the current state of the economy, anticipate changes in consumer behavior, interest rates, and monetary policy, and make informed investment decisions.

With its roots tracing back to the late 19th century, supercore inflation is a well-established concept that provides a more nuanced understanding of the impact of inflation on different segments of the population.

Now that I have covered all about the importance of supercore inflation, is it something that you will add to your trading toolbox?

Let me know in the comments below.

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