Tech stocks reclaim their mojo

Markets

US equities catapulted to stratospheric heights Tuesday, propelling the S&P 500 to unprecedented peaks fueled by President Trump's pro-growth directives, a monumental private sector investment in AI infrastructure, and stellar earnings that rekindled a stock market bonanza. Amidst the constant hum of tariff threats, President Trump shifted gears, spotlighting technology and artificial intelligence—a sector pulsating with potential just as it gears up for its latest earnings spectacle.

Trump's announcement on Tuesday revealed a gargantuan $500 billion private-sector pledge led by heavyweights such as OpenAI, SoftBank, and Oracle. This initiative, dubbed Stargate, is set to supercharge data center construction and create over 100,000 jobs across the U.S., heralding a new era of technological dominance. Indeed, tech stocks reclaimed their mojo.

This seismic shift in focus was mirrored in the markets as Netflix shares surged 14% in premarket trading on Wednesday, following a record-breaking holiday quarter that added 18.9 million subscribers and heralded upcoming price hikes. This windfall is symptomatic of a broader revolution in the AI sector, with pioneering efforts like xAI’s Grok 3 and Meta’s Llama 4 LLMs utilizing massive GPU clusters to shatter existing performance benchmarks and ignite an AI arms race.

Investors are rallying behind U.S. President Donald Trump's tech-friendly, AI-supportive policies and deregulatory agenda, setting aside lingering concerns about the potential economic fallout from his proposed tariff measures. This endorsement is vividly reflected in the soaring stock market, where optimism about these policies pushes equities to new heights.

Despite the technological exuberance, Trump's tariff sabre-rattling continued, albeit with a tempered tone. He maintained pressure on the European Union and signalled a 10% punitive duty on Chinese imports linked to fentanyl trafficking concerns. Yet, the more muted approach to China’s tariffs offered little reprieve to Chinese stocks, which remain hypersensitive to the caprices of U.S. trade policy.

As we head into Thursday, the anticipation builds for the Bank of Japan's upcoming policy decision on Friday. Markets are increasingly betting on a quarter-percentage point rate hike from the BOJ, pushing the short-term policy rate to 0.5%—a threshold not seen since the Global Financial Crisis.

Historically, the BOJ has approached its policy adjustments with caution. This time around, even as it potentially tightens, the bank is expected to emphasize a careful, gradual approach to its 'normalization' process, suggesting the BOJ might opt for what could be termed a 'dovish hike.' This strategy would aim to reassure markets that while steps are being taken towards normalization, they will be measured and closely monitored.

Forex markets

The markets initially bucked wildly in the currency realm but have since adopted a “ “wait and watch” stance. Some FX traders anticipate that significant tariff enactments might be postponed until more of Trump’s economically favourable policies take effect to act as a stabilizing buffer when or if tariffs hit. Despite the week’s wild currency swings, implied volatility has diminished, with three-month dollar/yen volatility hitting its lowest point since July as the market digests the impending Bank of Japan rate hike.

Amidst the fervour of U.S. equities ascending to new heights, the dynamics in the FX market paint a complex picture, especially for the yen. As U.S. stock market euphoria persists and Treasury yields climb—now nudging the USD/JPY to a commanding 156.50—the yen finds itself vulnerable to a myriad of correlation factors. The "risk on" environment is exerting its influence across various yen crosses (XXX/JPY), where global risk appetite is a significant driver. Historically, these pairs have a robust positive correlation: when risky assets thrive, so do X/JPY pairs; when market fear prevails, they falter.

The interplay between yields and stocks is gaining sharp focus, particularly with Trump's agenda rolling out. For USD/JPY, Treasury yields hold more sway, but stock market movements are more crucial for crosses like AUD/JPY and EUR/JPY. With both yields and stocks climbing overnight, the scenario spells potential trouble for yen bulls. This nuanced market dynamic, heightened by an anticipated Bank of Japan “ dovish” rate hike, suggests that even expected policy shifts may not bolster the yen if global risk sentiment continues its bullish streak unless the bank pulls a hawk out of the hat.

As we navigate these turbulent financial waters, understanding the intricate dance between yields, stocks, and currency movements becomes crucial for predicting the trajectory of yen pairs in this renewed era of market optimism under Trump’s second term.