Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

U.S. tech was the major outlier in an otherwise buoyant day for global stocks on Tuesday, as relief around the expected end of the U.S. government shutdown lifted the Dow to a record closing high and other indices to new peaks too.

More on that below. In my column today I look at the Japanese yen, and how its slide toward 155 per dollar is raising the risk that Tokyo intervenes to support it. Imminent action is perhaps unlikely, but investors should be vigilant. 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* AI's slight returns

AI spending is expected to run into the trillions of dollars in the coming years, meaning the bar for return on that investment is high. A deep-dive analysis from JP Morgan this week will intensify the debate even further.

Among the nuggets of the report 'AI Capex - Financing The Investment Cycle' garnering most attention is this: "Big picture, to drive a 10% return on our modeled AI investments through 2030 would require ~$650 billion of annual revenue into perpetuity, which is an astonishingly large number." As the authors note, that's 58bp of global GDP, or $34.72/month from every current iPhone user, or $180/month from every Netflix subscriber.

* UK rate cut bets soar

UK labor market figures for the third quarter on Tuesday were much weaker than expected, with unemployment rate rising to 5% for the first time in nearly five years. Gilt prices jumped, and the probability of a Bank of England rate cut next month leaped to 75%. 

Rates futures are fully pricing in 50 basis points of cuts by April. JP Morgan's Allan Monks went one step further - he now expects three more cuts, in December, March and June, taking rates down to 3.25% by the middle of next year. His previous call was for a 3.5% terminal rate. 

* 50-year U.S. mortgages?

Sticky inflation, sky-high rents, and the cost of living crisis in the United States are having political consequences - the Democrats scored notable mayoral and gubernatorial electoral successes last week, and President Donald Trump's approval ratings are tanking.

One way to ease housing affordability could be 50-year mortgages, an idea floated by the Trump administration over the weekend but already drawing sharp criticism from politicians and economists of all stripes. With next year's mid-term elections looming into view, this won't be the administration's last trial balloon. 

The yen's fall against the U.S. dollar is raising the specter of Japanese intervention to slow or reverse the slide. While imminent action is unlikely, investors should remain on high alert.

The Japanese currency is already below levels that prompted Tokyo to intervene to support it in the recent past, and is now hovering close to the 155 per dollar level that many Japanese companies say is a pain threshold. Last year's record low near 162 per dollar isn't all that far away either. 

Tokyo's first yen-buying intervention in over a decade came in September and October of 2022 when it spent around $60 billion boosting the currency, first after dollar/yen rose above 145 and then again as it approached 152. The Ministry of Finance also spent some $36 billion in July last year buying yen as the dollar pushed multi-decade highs near 162 yen.