Global Markets Morning Brief

Global markets are navigating a complex landscape shaped by robust corporate earnings, evolving trade policies, and geopolitical tensions. The ongoing U.S. government shutdown has created a data vacuum, placing even greater emphasis on the ongoing corporate earnings season for insights into economic health.

The most recent market developments, reflecting key geopolitical, macroeconomic, and corporate earnings factors influencing trading decisions for Europe-based investors before the US market opens. The US is actively considering broad software export curbs on China, which is pressuring European stocks and tech sectors in particular. US stocks show strong earnings delivery, signalling positive corporate performance overall. Treasury yields remain flat but jittery, commodities like gold and oil are rising on supply and geopolitical concerns, and FX markets are sensitive to inflation and geopolitical risks.

Equities: Earnings Resilience vs. Trade Jitters

​The equity market is being pulled in two directions. On one hand, the U.S. earnings season has provided a significant boost of confidence. With 85% of reporting S&P 500 companies surpassing profit estimates, this quarter is on track for the best performance since 2021. This strength is broad-based, with positive surprises from sectors including financials (Citigroup, Morgan Stanley) and consumer goods (Coca-Cola). However, this optimism is tempered by geopolitical and trade concerns. European stock futures are lower as the Trump administration considers wide-ranging restrictions on exports to China that rely on U.S. software. Such tit-for-tat measures deepen uncertainty in global supply chains and have fueled market volatility.

 Forex & Macro: Divergent Central Bank Policies

The dollar is steady, with potential to rise further if upcoming economic data surprises to the upside or if the risk of tariffs pushing up inflation increases. It has recently benefited from a short squeeze, where speculators closed earlier bets against the currency.

The €uro has strengthened on expectations of a more hawkish European Central Bank after Eurozone inflation hit a record high. In contrast, the British pound is under pressure due to concerns over the UK’s post-Brexit economic recovery.

The Potential USD/JPY Armageddon

The Japanese Yen will become a conundrum currency in FX markets and also for large capital flows across the global economy and financial assets. For all those who still presume that the Japanese Yen is going to be the safe-haven defensive trade in a stock market meltdown, you’d probably be grossly mistaken in that. Once you have sold your soul to the veneration of the false Gods of money, there are no more safe heavens, but only ebbs and flows in the liquidity flows of financial assets, and the Dollar/Yen carry trade has been consolidating in between the USD/JPY 125|120 and USD/JPY 160|150 levels for months and that it’s nothing less than a medium to long terms FX market positioning for a further Depreciation Shock to the Japanese Yen, that the newly elected Japanese Iron Lady with a softy softy mochi heart is going to deliver at the sound of the banging drums of Fiscal stimulus and inflationary pressures and how Japanese Corporates will then be forced to borrow in a low yielding currency and expand their acquisition and operations abroad, in Europe and United States to achieve higher yielding returns in a stronger currency, in other words, the carry trade 2.0 will be served as warmed-up Katsuobushi noodle soup, the hardest of foods’ ingredients melting in a hot-pot Japanese style noodle soup all with a softy softy mochi dessert to indulge with. And I have a sixth sense that the U.S. Treasury secretary meeting with their Japanese Colleagues have probably been around these topics, such as, how to accommodate more Fiscal Stimulus and the Treasuries supplies in the market, otherwise, the question resounds ” Who’s gonna buy and rollover the future additional Treasuries issuances and hold more American Public Debt to maturity ?”, but our Japanese friends of course, although with a little side effect of upcoming Inflationary waves to Asia, it’s a bit like trying a strange alchemy, in convincing the Japanese to depreciate even more the Japanese Yen, and let’s go back to the future, while on the other side, let’s try and see with this experiment, if we are able to engineer a wider inflationary wave across Asia, a.k.a. let’s see if China gets a bit of inflation to show up with, and that’s all to be seen.

What an Unexpected Japanese Yen Depreciation Would Mean

If USD/JPY were to break above 160 and sustain a move toward 200, it would have profound implications for financial flows and the global carry trade: A higher USD/JPY means continued, aggressive depreciation of the Japanese yen relative to the US dollar.​ With Japan still offering ultra-low interest rates and the US maintaining significantly higher yields, global investors would funnel capital from yen funding into higher-yielding US (and potentially other) assets at an even larger scale. Japanese investors and corporates would likely increase their purchases of foreign assets to seek better returns, accelerating capital outflows from Japan.

Carry Trade Implications

A move of USD/JPY toward 200 would be historically unprecedented, further turbocharging the carry trade and potentially amplifying both returns and systemic risks in global financial markets. The carry trade (borrowing JPY to buy high-yielding USD assets) would become even more attractive, so long as the yen remains weak and the interest rate differential is wide.​ As more capital chases the interest rate differential, the volume and risk in carry trades would surge, raising concerns about market stability and possible disorderly unwinds if the yen were to strengthen or volatility climbs suddenly.​ If the yen drops precipitously, the risk of intervention by Japanese or global authorities would increase, potentially triggering sharp, abrupt reversals as carry trades are unwound en masse. Corporate hedging costs would rise for Japanese importers, impacting profits for companies with large overseas exposures. Japanese exporters may become even more competitive, but the domestic Japanese economy could suffer from imported inflation and capital flight. Global risk appetite might rise short term due to easy funding, but financial system vulnerabilities would build, especially if FX volatility returns or policy changes disrupt the trade.

Central Banks will have to Rebalance Their FX Holdings

If the US dollar rises significantly, central banks are likely to adjust their foreign exchange (FX) reserve portfolios to maintain their target currency allocations due to rebalancing. Central banks tend to partially rebalance their FX reserves rather than fully adjusting to every move in exchange rates. However, larger reserves and more professional management prompt more systematic rebalancing toward maintaining a stable dollar share of reserves. Based on IMF data and studies, for the US dollar to maintain its roughly 59% share of global FX reserves during a significant dollar rise, central banks collectively might need to increase their dollar holdings by over $300 billion, which matches nearly half of the US 2020 current account deficit ($647 billion) and is a major capital shift on global scales. This reflects the scale of global reserve allocations and the US Dollar’s dominant role as the world’s primary reserve currency (IMF COFER Data, 2025) and (Reuters report on Dollar share in global reserves, 2025). Central banks typically rebalance portfolios to maintain desired reserve shares amidst exchange rate fluctuations, leading to such large capital flows (NBER Working Paper) and (BIS report on currency composition of reserves). Such incremental purchases of USD by central banks would likely translate into demand for dollar-denominated assets, notably US Treasury bonds, reinforcing capital inflows into US financial markets. However, the magnitude of rebalancing depends on specific countries, reserve sizes, policy, and governance; emerging markets tend to rebalance less consistently than advanced economies.

Hedging USD/JPY Carry Trade Positions in Extreme Moves

If Dollar/JPY moves toward USD/JPY 200, don’t call up at 4:30 to know you VaR numbers, ain’t gonna answer nicely, because risks of sudden, disorderly currency reversals would rise dramatically, especially for those engaged in the carry trade borrowing yen to invest in higher-yielding USD assets, then the whole of the Mizuho and Nomura London Office FX trading Floor should be fired on the spot. However, to protect these positions, sophisticated hedge strategies are key. ​

Currency Options, Forward and Futures Contracts

Put Options on USD/JPY: Buying puts gives the right to sell USD/JPY at a predetermined level. If the yen strengthens suddenly, the put option gains value and helps cap potential losses. This direct hedge is popular among leveraged traders.​ Risk Reversal & Option Structures: To lower costs, traders can implement collars (buying puts and selling out-of-the-money calls) or put spreads. This limits downside while managing option premium expenses; Hedge funds and prop desks may use futures for cost-effective, standardised hedging with daily margining.​ Entering forward contracts to sell USD/JPY locks in future currency rates, protecting against large swings. Suitable for institutions or corporates with clear forex exposures and settlement dates.  In an elevated USD/JPY market, these hedges become essential tools to guard against policy surprises, volatility spikes, and sudden reversals that have historically led to rapid unwinds and heavy losses.

Carry Trade Risk in Volatile FX Markets

Major FX platforms (e.g., Investing.com USD/JPY Chart) and risk management research—like BIS Quarterly Reports on Carry Trade Exposure—show that sharp currency moves often coincide with increases in volatility and speculative futures positioning. Risk metrics, such as Value-at-Risk (VaR), surge when USD/JPY spikes, making systematic hedging more valuable than ever.​

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