JPMorgan says the carry trade that pummeled markets is only half done

• The unwinding of the carry trade that's battered stocks in recent days isn't done, JPMorgan says.
• That trade is probably only half-over, as Japan looks poised to continue raising rates, it said.

The carry trade unwind that helped spark the bloodbath in US stocks over the last few days likely isn't close to over, according to JPMorgan.

Arindam Sandilya, the bank's cohead of global FX strategy, pointed to the recent sell-off in global equities, with major US stock indexes plunging over the last three trading days.

Market commentators say that's been partly stoked by a surprise 15 basis-point interest-rate hike in Japan, which triggered some investors to unwind a trade that's become popular in recent years. In this trade, investors borrow cheap yen and deploy the cash into higher-yielding assets elsewhere, like US stocks. As the yen strengthened and borrowing costs rose, investors taking advantage of the carry trade received margin calls, sparking a wave of selling around the world.

Yet, the unwind is probably only half-done, and investors hoping for a quick rebound are likely to be disappointed, Sandilya said.

"We think that the carry trade unwind, at least within the speculative investing community, is somewhere maybe 50%-60% complete," Sandilya said in an interview with Bloomberg on Tuesday. "So we are not done, by any stretch."

The Bank of Japan will likely continue to slowly raise interest rates, Sandilya said, given that borrowing costs in the nation are "nowhere near" calibrated to its real economy.

Policymakers in the country are eyeing inflation risks, according to the central bank's latest meeting minutes, which suggest more policy tightening is in store.

Meanwhile, according to technical studies JPMorgan conducted, investor portfolios don't tend to recover quickly after experiencing technical damage from a major move, as markets have displayed over the past several trading days.

"You don't tend to get V-shaped reversals back to where the moves started from. All you tend to get is — at least, a good case outcome is stabilization in markets around current levels, maybe a shallow recovery at best," he said, adding that JPMorgan remained in a "defensive mindset."

US stocks were slightly higher on Tuesday as traders tried to claw back some of their losses from Monday's session, which marked the worst day for stocks in two years.