Global markets experienced a jolt this week, marked by a significant surge in Japan’s yen to its strongest level since February. This move appears to be driven by market repositioning ahead of an anticipated interest rate rise from the Bank of Japan next week. The case for a BOJ hike was reinforced by an upgrade to Japan’s second-quarter GDP estimates and the largest annual rise in real wages in five years for July, prompting some speculation of a potentially larger-than-normal rate increase. Alongside China’s yuan and South Korea’s won, the yen is currently gaining considerable ground against the US dollar, causing some nervousness about the ripple effects of unwinding yen-funded carry trades in global markets, reflected in Tokyo’s Nikkei stock index recoiling almost 2% on Tuesday.
Despite these currency shifts, the broader global economic picture remains robust. Similar to Japan, the Eurozone’s second-quarter GDP estimates were revised higher this week. Coupled with a strong US employment report for August, these factors strengthen the argument for another series of interest rate rises this month, potentially even from the US Federal Reserve. This view is further compounded by oil prices steadily climbing towards US$100 per barrel, following Iran’s pledge of “economic warfare” against America and Houthi attacks on Saudi Arabian energy facilities.
Stocks, along with industrial metal copper, which often serves as a bellwether for world growth and hit an all-time high on Monday, have until now largely sided with this buoyant growth outlook. However, a clear tension is emerging between such strong economic growth and the necessity for rising interest rates to prevent overheating and unfettered stock market gains. As Wall Street returned from its Labor Day holiday, most stock indices were in the red before the bell. Meanwhile, China’s exports rose a robust 25% year-on-year in August, boosting both its global trade surplus and its surplus with the United States, while Canada implemented retaliatory tariffs on US goods, intensifying their bilateral trade dispute.
