The February 2026 Selloff › Why Tokyo Sells When New York Panics

The February 2026 selloff was global. South Korea's KOSPI fell 5.26% on February 2 and then 3.86% on February 5. India's Nifty IT Index had its worst day since March 2020. Japanese, Australian, European, and emerging market equities all fell. Bitcoin, supposedly uncorrelated with anything, crashed alongside software stocks and precious metals. The old saying that "in a crisis, all correlations go to one" played out in real time. This was not always the case. In the 1990s, the Asian financial crisis remained largely regional for months. The 1987 crash took hours to propagate across time zones. Today, contagion is nearly instantaneous, and the reasons are structural. The algorithmic web is a big part of it. Fundamental discretionary traders account for only about 10% of equity trading volume, with roughly 60% driven by passive and quantitative strategies. Some estimates put the machine-driven share of daily U.S. equity moves at 80%. These algorithms operate across markets and time zones simultaneously. When S&P 500 futures sell off during Asian hours, algorithms in Tokyo, Hong Kong, and Sydney respond within milliseconds, selling local index futures and triggering cascading sales in underlying equities. CTA trend-following strategies react to price moves regardless of which exchange or time zone generated them. No human is in the loop to say "this is a U.S. software problem, not a Korean semiconductor problem." The algorithm sees a price signal and acts. ETF arbitrage is another transmission mechanism. U.S. ETFs account for over 31% of total equity trading and hold more than \$6.2 trillion in assets. When a country ETF trades at a discount to its net asset value, authorized participants buy the cheap ETF shares, redeem them for the underlying securities, and sell those securities. This arbitrage, designed to keep ETF prices aligned with their components, becomes a direct channel for transmitting U.S. selling pressure into foreign markets. Research across 41 countries found that an increase in the U.S. VIX directly creates selling pressure in country ETFs, which the arbitrage mechanism then transmits to local markets. The introduction of a country ETF itself increases that country's stock market correlation with the U.S., especially during high-volatility periods. ETFs have linked the world's equity markets into a single system, with the VIX as the driver. The largest source of global contagion, though, is leverage that spans borders and asset classes. The yen carry trade, in which investors borrow cheaply in yen and invest in higher-yielding assets elsewhere, was estimated at roughly ¥40 trillion (\$250 billion) before its unwind in August 2024. When the Bank of Japan unexpectedly raised rates and the yen surged 6% in a week, Japanese investors and hedge funds who were short yen sold their most appreciated assets: U.S. momentum stocks. This is why Nasdaq performance became correlated with a Bank of Japan interest rate decision. The Nikkei fell 12.4% on August 5, 2024, its worst day since 1987. High-yielding currencies from Mexico to Brazil to South Africa fell sharply. The carry trade unwind showed that leverage denominated in one currency transmits shocks to equity markets on the other side of the planet. The Treasury basis trade carries a similar risk. Hedge funds exploiting the tiny price gap between cash Treasuries and futures contracts currently hold net short futures positions exceeding \$800 billion, using leverage of 20x to 50x. In March 2020, when margins spiked and repo funding dried up, basis traders sold roughly \$100 billion in Treasuries in days, driving yields higher at the exact moment investors expected bonds to rally. The Fed had to purchase \$1.6 trillion in bonds to prevent a systemic collapse. The trade has only grown since. The dollar itself creates another feedback loop. The U.S. dollar consistently strengthens during global selloffs. During March 2020, the dollar index surged from 96 to 103, causing severe dollar shortages worldwide. Countries with dollar-denominated debt face rising servicing costs. Their central banks sell dollar reserves to defend local currencies, but those reserve sales often mean selling U.S. Treasuries, which amplifies stress in the very market investors are fleeing to for safety. The U.S. net international investment position stood at negative \$27.6 trillion as of the third quarter of 2025, meaning foreigners hold far more American assets than Americans hold abroad. When those foreign holders need to raise dollars, they sell their most liquid U.S. positions, adding to the selling pressure. In February 2026, the contagion path followed a familiar pattern. Bitcoin's crash triggered margin calls that forced traders to dump precious metals. Gold's 12% single-day crash generated further margin calls across multi-asset portfolios. Software selling in New York transmitted to RELX, Thomson Reuters, and SAP in London and Frankfurt. South Korean and Taiwanese semiconductor stocks fell in sympathy with AMD and Qualcomm. The fact that these assets have no fundamental relationship to each other was irrelevant. They were connected by leverage, by algorithmic cross-referencing, and by the margin accounts of investors who held all of them.