Much ‘to do’ about yen intervention
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August 3 :
What matters in U.S. and global markets today
By Mike Dolan, Editor-at-Large, Finance and Markets
Japan’s yen strengthened further on Monday as the U.S. and Japanese governments confirmed their first joint intervention since 2011 to prop up the ailing currency from recent 40-year lows. Both the timing and impact of the move are being examined closely.
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I’ll get into that and more below.
But first, listen to the latest episode of the Morning Bid daily podcast, where we discuss the historic intervention, U.S. corporate earnings growth and the latest on Iran.
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MUCH ‘TO DO’ ABOUT YEN INTERVENTION
There are many questions about the timing of Friday’s joint yen intervention. The Bank of Japan had delayed another interest rate rise last week, partly because of the recent earthquake in the country, and perhaps Tokyo and Washington fretted about how that decision could impact the yen. Then there’s the real prospect of a Federal Reserve rate rise as soon as next month.
Either way, Japan sold almost $60 billion to support the yen and Scott Bessent’s “to-do” list revealed U.S. plans to spend between $5 billion and $10 billion. Successful or not, the two sides have pledged to repeat the action as necessary.
The fallout may be aggravating U.S. bond yields on the assumption that Japan, the biggest single overseas creditor to the U.S. government, could liquidate Treasuries to raise the dollars to sell. Bessent, however, said that a Fed repo facility using Japan’s bond holdings as collateral was activated.
Otherwise, Treasuries have caught something of a break from President Trump’s latest pause in bombing Iran, which comes as he claims fresh talks between the two sides would take place on Monday. Oil prices fell over 5 per cent on the development to below $84 per barrel.
In equities, Asia markets started the week in the red, with South Korea’s volatile KOSPI sliding more than 5 per cent after a record rally last Friday. Stateside, Wall Street futures were up before the bell.
This week the U.S. July employment report comes into view, while the U.S. earnings season rolls on, with companies set to report including Palantir, AMD and SpaceX.
There have been some eye-popping metrics so far, with aggregate annual S&P 500 profit growth tracking a whopping 47 per cent in the second quarter, according to LSEG data. That’s almost twice what was expected a month ago, as Big Tech’s AI push combines with a bumper quarter for the big banks and Big Oil.
This level of growth has only been exceeded in recent decades during the bouncebacks from the banking crash and pandemic recessions. But, of course, there’s been no recession this time.
This staggering earnings growth helps explain why both dip-buying and sectoral rotation are the preferred responses to recent volatility on Wall Street, rather than cashing out.
In deals news, AstraZeneca shares fell sharply on Monday as investors baulked at reports of merger talks with Bristol Myers Squibb – mooted tie-up that would form one of the world’s biggest drugmakers with a combined value of nearly $400 billion.
Chart of the day
The U.S. and Japan intervened to buy yen against the dollar and euro last week in the first such joint action since 2011. They pledged more action as and when necessary, and the yen, which is up around 4 per cent against the dollar since Japan’s first action on Thursday, briefly hit its best levels since early May on Monday.
The action has arrested a slide that took the yen to 40-year lows last week, with renewed currency weakness a feature so far of Sanae Takaichi’s nine months as prime minister.
A fresh bout of fiscal spending and perceived pressure on the Bank of Japan not to raise interest rates have been factors, but so too has speculation about how Japan will finance hundreds of billions of U.S. investments pledged in the bilateral trade deal between the two countries.
Today’s events to watch
• U.S. ISM manufacturing PMI for July (10 a.m. EDT)
• U.S. corporate earnings: Palantir
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Mike Dolan)
Source: Reuters
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