Making sense of the forces driving global markets |
By Jamie McGeever, Markets Columnist |
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- Stocks end in the red, mostly. Main U.S. and European indices fall 0.7%-1.1%, but Asia holds up better - China flat, Japan in the green, MSCI Asia ex-Japan down 0.4%
- The dollar has its best day in over a month, rising 0.8% and rebounding from last week's three and a half year low. With bearish positioning and sentiment so stretched, it looks like a proper snap back has finally occurred.
- Oil leaps more than 4%, with Brent futures well above $76/bbl and WTI futures back above $75/bbl.
- Treasury yields fall across the curve, as much as 7 bps at the long end which bull flattens the curve. $23 billion auction of 5-year TIPS draws strong demand.
- Silver rises above $37/oz for the first time in over 13 years. It's up 12% so far this month, pulling away from gold, which is up 2% in June.
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Escalation fuels trepidation |
Whatever hope there was on Monday for a de-escalation in the Iran-Israel conflict was obliterated on Tuesday as the two countries kept up attacks on each other, and the US sent more fighter jets to the region and bolstered its forces there. Investors were further unnerved after President Donald Trump said on social media that the U.S. has no immediate plans to "take out (kill!)" Iran's Supreme Leader Ayatollah Ali Khamenei but Washington's patience is "wearing thin". Fading prospects of peace triggered a wave of 'risk off' activity across world markets. Stocks fell across the board, oil rose, government bond yields fell sharply and the dollar rediscovered its safe haven appeal to notch its biggest rise in over a month. Curiously, gold barely got any lift, perhaps struggling for renewed momentum so close to its all-time high of $3,500 an ounce. Instead, silver was the best-performing precious metal, climbing to a 13-year high above $37 an ounce. |
Adding to the caution were U.S. retail sales and industrial production figures, both of which were weaker than economists expected, at least at the headline level. If U.S. consumers are drawing in their horns and factories are feeling the squeeze even before tariffs hit, growth in the second half of the year will slow. The outlook for tariffs, growth and inflation - not to mention war in the Middle East - will guide the Fed's policy decision and revised economic projections on Wednesday. It's an increasingly difficult line for Chair Jerome Powell and his colleagues to tread. The Bank of Japan, meanwhile, adopted a more cautious stance on Tuesday. It left its short-term policy rate on hold at 0.5%, as expected, and voted to slow the pace of balance sheet rundown in fiscal year 2026. With the BOJ's policy rate likely to remain on hold for the rest of the year, according to market pricing, and the pace of balance sheet reduction not changing until March, the impact on Japanese assets in the near term could be limited. Not that investors will be getting complacent - the Israel-Iran war and Fed decision on Wednesday will see to that. |
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Foreign central banks are shrinking US asset exposure |
As debate rages around 'de-dollarization' and the world's appetite for dollar-denominated assets, one major cohort of overseas investors appears to be quietly backing away from U.S. securities: central banks. That's the conclusion to be drawn from the New York Fed's latest 'custody' data, which shows a steady decline in the value of Treasuries and other U.S. securities held on behalf of foreign central banks. There are many ways to gauge foreign demand for U.S. assets, and they often send conflicting signals. Moreover, the broadest and most accurate measures, like U.S. Treasury International Capital (TIC) or the International Monetary Fund's 'Cofer' FX reserves data, come with a long lag of two months or more. The New York Fed custody holdings figures are weekly, which is as 'real time' as it gets in the world of central bank flows. |
These figures last week showed that the value of U.S. Treasuries held at the New York Fed on behalf of foreign central banks fell to $2.88 trillion. That's the lowest since January, and the $17.1 billion decline was also the biggest fall since January. Including mortgage-backed bonds, agency debt and other securities, the total value of foreign central banks' U.S. custody holdings at the New York Fed last week dropped to $3.22 trillion, the lowest since 2017. That figure has fallen by around $90 billion since March, just before President Trump's 'Liberation Day' tariff debacle on April 2, with more than half of the decline coming from Treasuries. |
If these moves are representative of broader trends, then FX reserve managers are reducing their exposure to U.S. bonds, as a share of their overall holdings and in nominal terms too. |
What could move markets tomorrow? |
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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. |
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