Japan beating US to the punch in addressing long bond yields
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Welcome to the Saxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the host and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only. Hey everyone, it is Tuesday, 27th of May, 2025. Plenty going on overnight in Asia as we have

A Reuters story indicating that Japan's Ministry of Finance was sending around a questionnaire asking market participants on the issuance amounts for JGBs, obviously at the long end of the yield curve after the recent blowout in Japanese yields.

We had the 20-year off some 20 basis points overnight on this story. So getting a lot of coverage. Of course, the impact into FX was the Japanese yen weakening quite sharply. And the news broke when dollar-yen was sort of testing new local lows here over the last week plus. So this was quite impactful and really seeing the dollar dragged higher as well. It's kind of interesting because, you know,

This is a sign of maybe baby steps towards some kind of financial repression, manipulating yields along the curve like this. It's the eventual policy tweak we expect from the US at some point. But in the meantime,

This is just sort of calming the market down. So we have risk appetite really in fine fettle here because of, of course, Trump backing off the EU tariff threats or at least suspending those tariff threats for now. We have Europe in good order as well. It just feels like these financial repression moves are keeping the market calm. And we asked on Friday, has the market gotten too bearish of U.S. Treasuries? And it's this weird sense that

We should not structurally be in any way bullish on Treasuries, but the trade has been very much very aggressively short, U.S. Treasury. So we've pulled back into well back into the range at the long end. This move in Japan certainly helping that out. We saw a very soft French CPI number out this morning for May. The flash number is 0.7% year on year versus 0.9% expected. And just bonds are getting a bid here.

Interesting to see though the pattern across markets with the dollar finding a bit of a bid on this as well, at least this morning. Does that hold though into the US session? So we saw an extension in dollar weakness after the weekend. It looked quite promising. We had Eurodollar back above $1.14. I want to say quite promising for dollar bears. That move is stumbling here and I think it's up to the US session today to determine can we inject some fresh energy into the dollar bearish case

Or are we just going to get stuck back in the range? Some levels to look at for Forex traders. Dollar/yen 144.60 is a key first sort of retracement area. No trouble for the dollar/yen bearish case until well above 145, even 146. Although if it does get back above 146, I think we're talking about some more significant trouble for the near-term potential for that dollar/yen bear trend to sort of reassert.

Eurodollar risks sort of a similar setup. There's quite a bit of range to work with to the downside of this attempt towards 114 and above, arguably 113.80 is failing. And on Aussie, it's around 64.50. I mean, if we're back below there, it's again, we're stuck back in the lower range that was churning back and forth recently and really awaiting for next catalysts.

Also kind of interesting to me to see what gold is doing here. I mean, the gold bullish case should be really well supported by the notion that various sovereign nations are going to need to manipulate yields to prevent them from doing what market forces would do to them, bond vigilantes, etc.

And we're seeing a calm bond market, meaning lower gold prices, at least this morning. So we had gold even below $3,300 here this morning. I think some of that, of course, in line with the general dollar backing up picture here. But I would say a bad stumble in the gold market is sort of just setting the scene for, again, a walk in the desert here on the themes that have been driving the dollar weaker here in the near term.

But a key test, if you look ahead, we've got, again, risk and appetite in really nice form here so far, at least. The big test, as mentioned yesterday, NVIDIA earnings after the close tomorrow. My colleague Jakob wrote a preview piece on those earnings. I'll put the link in the podcast description. Have a read of that. It really is key to see, of course, among just the general outlook, obviously, and guidance on demand, what they're saying about this new trend.

not export ban, but export limitation chips they've created, again, to skirt the U.S. or to sort of fulfill the U.S. limitations on chip speed. They're creating a special version of the chip for export to China.

what's the forecast demand there, and then as well on margins. So they've been having trouble with their incredibly generous and positive margins historically. Those margins are under pressure and of course, NVIDIA's valuation is very much built on these incredible margins. So any spin on the margin issue is really key as well. But also as sort of as a backdrop note here, there was a Wall Street Journal article noting that investors are piling into ETFs at record pace

$437 billion in US ETFs have been snapped up this year. That's really strong signs of a strong retail bid in this market. Just means nothing for the very near term, but I think if it's retail that is the lead here,

I have some concerns about the status of this market if we look beyond this significant comeback in risk sentiment. Oh, and also to tout other pieces we've been looking at. So I'm doing a four-part article series on trading investing in the era of Trump 2.0. I'll put a link for the first article in yesterday's podcast description, and I'll put a link to the second one that I put out yesterday in today's podcast episode description, talking about

the US, exceptional US market valuation, equity market valuation, and some of the reasons, very good reasons, that the US market deserves a strong valuation relative to global peers.

But as well, some things that could threaten that, among other things, something that's no secret. And we've mentioned many times in the podcast that incredible concentration in the very largest companies in the U.S. that are such a large percentage of not only the U.S. index, but global indices for stocks.

and showing what I think is a pretty interesting chart. If you adjust for currency, the performance of the U.S. market relative to, for example, the German DAX since Trump's election, incredible divergence there. The DAX up some 25% in euro terms, if I recall correctly, around there, and the U.S. market down actually a few percent as of

Friday's closed since the November 5th election. So there's already this U.S. unexceptionalism has been partially running as a theme really since the end of last year or at least the beginning of this year.

yeah so looking at the calendar we've got that uh we've got the nvidia earnings piece uh the just looking at it feels like this market is is a bit running dry for catalysts here volatility is generally on the decline of course with risk sentiment strong that's no big surprise the french cpi quite interesting this morning but the german one carries a bit more weight it's not up until friday and that incredibly low level not in germany like it is in france so at 2.1 is the expected

I believe the expected year on year for Germany. And it's really the core that is the issue in Europe, not these headline numbers. And that next major core reading is not up until next Tuesday with the EU reading for the core and running at 2.7%. Still a troublesome level relative to where policy is at and where they'd like to take it to support the economy, but will have a hard time doing so, at least with their single mandate of tracking inflation.

All right, going to keep it short today. Again, we have the U.S. session. We have the U.S. back from a holiday, a long holiday weekend today. Interesting for FX to see how the dollar closes on the day, as well as risk sentiment and the Treasury market. If it continues to see a strong bid at the long end of the yield curve, it appears to be that this is also feeding animal spirits to a degree as well. And how that operates vis-a-vis the dollar will be quite interesting today as well.

In any case, that's it for today. We'll be back tomorrow with the next Saxon Market Call.