A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

World stocks leaped to record highs on Tuesday, boosted by a relentless stream of strong U.S. and global earnings, with another slump in oil prices on Middle East peace hopes pushing down on bond yields and lifting investor sentiment also. 

In my column today, I dig deeper into America's unprecedented currency market intervention last week. Washington's commitment to help Japan prop up the yen should not be doubted, but there is a fair degree of self-interest at play too, especially regarding the $29 trillion U.S. Treasury market. 

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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* Dollar drift?

The U.S.'s historic intervention in the yen last week may mark an inflection point for the dollar, not just against Japan's flailing currency, but more broadly. If dollar/yen has topped out, and the threat of more intervention forces traders to cover their massive short yen position, the spillover to other dollar/Asia crosses is not difficult to imagine.

Does this ease some of the 'beggar thy neighbor' approach to FX policy across Asia? Again, it's a plausible scenario, especially if peace breaks out in the Middle East and the slump in oil prices continues to pull Treasury yields down from their recent highs. A lot of "ifs and buts" in there, but there is a case building that the dollar's 2026 race might be run.  

 * Reaction (mall)function

A 20% slump in oil prices over the last 10 days has taken the heat off the Treasury market, at least at the short end, and by extension, the Fed. But debate continues to swirl around what the Kevin Warsh Fed's reaction function will be. Warsh refuses to tell us what his is, so investors are taking their cue from others. 

The three FOMC dissenters explained their decisions on Friday, and New York and Philadelphia Fed Presidents John Williams and Anna Paulson have outlined their thinking this week. Is the center of gravity at the FOMC starting to shift? The 9-3 vote to leave rates unchanged last week wasn't necessarily a "dovish hold", and it is likely to be quite different in September. Rates futures only pointing to one fully-priced hike this year. Too timid? 

* Block rockin' beats

Investors by now know just how strong U.S. earnings growth is, but some of the numbers bear repeating. According to SocGen earlier on Tuesday, six out of 10 firms have reported, 70% of market cap, and only 9% have missed estimates, the lowest reading ever, while 86% of firms have beaten estimates. Both S&P 500 and ex-tech margins have hit record highs. Q2 y/y earnings growth will be over 30%, according to UBS, and even approaching 50%, according to LSEG estimates.

Either way, it's a bullish backdrop.Is it all priced in though? High market leverage and real yields are headwinds, but a reversal would require aggressive Fed tightening and yield curve inversion, says SocGen. So no reason why 8000 on the S&P 500 cannot be reached, right?  

The U.S. bond market has long had a dark cloud hanging over it: the threat that one of America’s biggest creditors, most likely China or Japan, might liquidate some of their enormous Treasuries holdings, driving up borrowing costs and triggering an economic and market crash.

Markets have largely shrugged off this doomsday scenario for decades – and for good reason – but the historic joint U.S.-Japan currency intervention last week is a reminder that they shouldn't get complacent.

For years, most experts believed that China, America's main economic and geopolitical rival, would be the country likely to trigger such a crisis. But Beijing’s stash of Treasuries has actually shrunk over the past decade.

From a purely financial perspective, Japan, arguably America’s biggest ally in Asia, poses as much of a threat due to the sheer scale of its exposure to U.S. debt. It’s officially America’s biggest international creditor, to the tune of $1.14 trillion.

Of course, no one expects Tokyo to willingly light the fuse on this potential tinderbox, but that doesn't mean accidents can't happen. Especially now.