Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

World stocks rallied on Monday, propelled by optimism around Japanese Prime Minister Sanae Takaichi's thumping election win and a rebound in tech, while the dollar slumped on reports that China has advised financial institutions to curb exposure to U.S. bonds. 

In my column today, I explore why Takaichi's landslide election victory doesn't necessarily signal plain sailing ahead for the yen or Japanese government bonds. Both markets are highly sensitive to the deteriorating fiscal outlook and how authorities plan to address it.

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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* One G7 prime minister flying ...

Japanese Prime Minister Sanae Takaichi's historic election victory on Sunday gives her a mandate no leader has ever had. The question now, for markets, is how she funds her promises to ramp up spending and cut taxes. 

The conservative leader insists the fiscal stimulus will be delivered in a "responsible" manner. One way to help pay for it is by selling foreign assets. And Japan has plenty of those. Japanese stocks may be indifferent to how the splurge is funded, but the yen and JGBs will be more sensitive. 

* ... another sinking?

British Prime Minister Keir Starmer's fortunes, meanwhile, could not be in starker contrast. Eighteen months after securing a landslide election victory of his own, he is facing down growing calls to resign amid the Peter Mandelson/Jeffrey Epstein scandal.

His premiership appears to be in the balance as close aides quit, although Labour Party lawmakers gave him their backing on Monday. So, some reprieve for Starmer, but this could run. Gilts are under pressure, and sterling is too against the euro, but less so against the dollar. 

* Hyperscalers' hyper-borrowing? No problem

Worries over U.S. Big Tech's eye-watering AI capex commitments may have been exaggerated, if demand for Google owner Alphabet's bond sale is any guide. Or, investors are increasingly discerning and Alphabet is firmly in the AI 'winners' camp. 

The planned $15 billion bond offer reportedly drew over $100 billion of demand, a vote of confidence from investors and a turnaround from last week when the company's pledge to spend up to $185 billion on AI this year sent shares lower. Will demand for other hyperscalers' debt be so strong?

Financial markets supposedly hate "uncertainty", yet the total clarity of Japanese Prime Minister Sanae Takaichi’s election victory on Sunday could usher in a period of heightened volatility in the country's currency and bond markets. 

Long-dated JGB yields quickly retreated after initially popping higher on Monday, and the yen rallied towards 156 per dollar after initially slipping to 158 per dollar. 

But this calm may not last. There is still little clarity on how Takaichi will fund her fiscal push. On top of this, her mandate raises the potential for friction between the government and the Bank of Japan.