4th September - The Yen Pulls Everything With It
In terms of geopolitics, there is little new to report. Oil continued to rise yesterday with no sign of progress in the Middle East. Until we see something concrete, the inflation impulse driving this market is not going anywhere. What makes yesterday interesting is that for once the Middle East was not the story. The market spent the session trading off Tokyo instead.
The yen strengthened sharply, with USD/JPY falling 1.82% and dropping nearly three yen to reach a one-month high for the currency. That is its strongest level since the 3rd of August, which was shortly after the US and Japan staged their joint intervention on the 31st of July. The driver was twofold, with continued speculation about further Japanese intervention combining with rising expectations of BoJ rate hikes. We still will not be able to confirm whether an intervention took place for some weeks, but the market is clearly positioning as though one has happened.
What I found most interesting was a line in CNBC's coverage of the move, which noted that analysts believe prolonged weakness in the yen could prompt Japanese domestic investors to reduce their holdings of US Treasuries. That is exactly the point I made in yesterday's post, that Japan holds around $1.2 trillion in reserves, mostly in Treasuries, and that a weak yen forces selling of US government debt at precisely the wrong moment for yields. It does rather effectively reinforce how connected the currency story and the bond story have become.
The transmission chain then ran exactly as you would expect. Yen strength eased concerns around global inflation, which pulled US Treasury yields lower, and falling yields lifted both equities and the metals. One currency move dragged everything else along behind it.
Forex
Beyond the yen, the dollar was broadly weaker across the board, with EUR/USD rising 0.32% to 1.1626, GBP/USD up 0.30% to 1.3525 and AUD/USD gaining 0.45% to 0.7200. The Aussie has since pushed above 0.72 this morning, which is its highest in months and a continuation of the run it has been on since last week's inflation print. That trend has now been running for the best part of two weeks and shows no real sign of exhaustion.
The other development worth flagging is that we finally have some meaningful pushback from within the Fed. Governor Christopher Waller told Reuters he is inclined to support holding the funds rate steady at the next meeting, though he added he could be swayed towards a hike if progress on inflation reverses. That matters, because the market was pricing a September hike at over 60% after Warsh told the Jackson Hole Summit that the Fed "has work to do." Waller's comments suggest the committee is nowhere near as unified as Warsh's rhetoric implied, which contributed to the easing in yields yesterday.
It is worth keeping the timeline in mind here. The FOMC decision is on the 16th of September, and between now and then we have only two significant data points, today's NFP payrolls and next week's inflation readings. There is not much runway left for the market to change its mind, which makes this afternoon considerably more important than a typical NFP.
Indices
The broader market had a good day yesterday, and the reason had very little to do with corporate earnings. As covered above, the yen's rally eased concerns around global inflation, which in turn pulled US Treasury yields back from the highs they had reached earlier in the week. That is the whole story. The 10-year had touched 4.818% on Wednesday, a level we had not seen since November 2023, and any retreat from there gives equities room to breathe by lowering the discount rate applied to future earnings. Add in Waller's dovish comments suggesting the Fed is not as unified on a September hike as Warsh implied, and you have two separate reasons for yields to ease within a single session. Equities took full advantage.
It is worth being clear about what that means, though. This was not a rally built on anything improving in the underlying economy or in company performance. It was a rally built on a currency move in Tokyo temporarily relieving pressure in the US bond market. That is a fairly thin foundation, and it can reverse just as quickly if the yen gives back its gains or if today's payrolls come in hot.
Against that backdrop, Broadcom reported after Wednesday's close and it is a result worth dwelling on. The company beat estimates, and its guidance also came in above expectations. The shares softened anyway, because the market decided the outlook did not match the extremely bullish tone that Nvidia set the week before.
That is worth taking the time to digest, as it is significant. A company beat on the quarter, beat on the guidance, and was sold because it did not beat by as much as the sector leader had. This is the same pattern we have been tracking since Alphabet back in July, but it has now escalated. It is no longer enough to exceed expectations, you have to exceed them by more than the best performer in your sector managed. That is an extraordinarily high bar and it tells you a great deal about how much optimism is currently priced into this space.
It does at least partly answer the question I posed yesterday about whether AI spending extends beyond Nvidia. On the evidence of Broadcom's numbers, it does, just not at the pace the market has now convinced itself of. That gap between reality and expectation is where the risk sits, and Schwab flagged the possibility that Broadcom's softness spreads to the wider chip complex. So we have the odd situation where the index rose on falling yields while the sector that has driven most of this year's gains looked distinctly shaky underneath.
Precious Metals
The bounce I flagged yesterday has turned into a genuine recovery. Gold rose 1.88% yesterday and reached an intra-day high of $4,511, while silver gained 2.42% and touched $67.45. From Tuesday's lows, gold is now up roughly 4.4% and silver 5.8%, which means both have recovered the overwhelming majority of the correction in the space of three sessions.
The zone I marked out around $4,350 has held emphatically. That was where past support coincided with the 0.5 fib retracement and the 200 day moving average, price briefly broke below it before reversing hard from exactly that area and adding more than $200 since. It is always satisfying when a level you have identified in advance does its job, and it is a useful reminder of why marking these zones out beforehand is worth the effort.
I would still add a note of caution before getting carried away. This recovery has been driven by yields easing on the back of the yen move rather than by anything actually changing in the inflation or rate picture. Oil is still elevated, the Fed is still expected to hike this month, and Warsh has not softened his position. Waller's comments help, but he is one voice. Today's payrolls will decide whether this becomes a genuine trend or simply another bounce that fails. A soft print undercuts the case for a September hike, pulls yields lower and gives the metals a real reason to extend. A strong one sends us straight back towards the lows.
Today's Market Drivers
US Non-Farm Payrolls, 1:30pm UK time - The dominant event, and one of only two significant data points before the FOMC on the 16th. ADP at 38,000 and JOLTS hiring at a seven month low both point towards a soft print.
The Yen After Its One-Month High - Worth watching whether it holds or whether the market tests Tokyo's resolve again, as it has after every previous intervention.
Broadcom's Read-Across - Whether the softness spreads to the wider chip complex, having beaten on both earnings and guidance and been sold anyway.
Comments