Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Solid U.S. bank earnings and a rebound in tech lifted U.S. stocks on Thursday, with global risk appetite also fueled by - and oil prices clobbered by - a more moderate tone from U.S. President Donald Trump on tensions with Iran. 

More of that below. In my column today I look at Japan's return to economic normality after years of zero interest rates and deflation. But with the brave new world of inflation and rising bond yields comes uncertainty and volatility.

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Oil on the slide

Oil is on a wild ride, buffeted by geopolitical tensions in large part sparked by the Trump administration's military foray into Venezuela, and events in Iran. On Wednesday, Brent crude was at a three and a half-month high, up almost 10% year to date.

On Thursday it posted its biggest fall since June after Trump said the crackdown on protesters in Iran was easing. If the threat of US-Iran conflict cools, oversupply returns as the main market driver. But as this year has clearly shown, Trump's foreign policy agenda is, if nothing else, unpredictable.

* Fed bets fade, curves flatten

Fed rate cut bets are fading. The next fully-priced cut is drifting to July from June, and 50 bps of easing this year is no longer fully baked into the 2026 curve. Stronger-than forecast economic data and sticky inflation are behind the moves.

Among the ripple effects on markets is a flattening of the yield curve. Most parts of the U.S. curve are now at their flattest in a month, with the 2s/30s curve narrowing 20 bps from its 4-year peak just last week. 

* Dollar and the odd yuan out

The U.S. dollar continues to grind higher, as Fed rate cut expectations whittle away. The greenback on Wednesday hit an 18-month high against the yen, and on Thursday a six-week high against a basket of major currencies.

The big exception is against China's yuan. The dollar is now firmly below 7.00 yuan at its weakest since mid-2023. With China racking up a record $1.2 trillion trade surplus last year, Beijing can point to dollar/yuan and reasonably argue it is not keeping its currency artificially weak. 

Japan's economy is returning to something resembling normality for the first time in decades. That's likely to mean more volatility ahead for the yen and other Japanese assets, as investors try to make sense of this new reality.  

While Japanese equities are rising to levels never seen before, that is less remarkable because many other countries' stock markets are also hitting new all-time peaks. The more intriguing market moves in Japan are happening in government bonds (JGBs) and the yen. 

Bond yields across the JGB curve are at multi-decade or record highs, marking a stark disconnect from other major debt markets like the U.S., where Treasury yields have been fairly stable in recent months. 

The yen, which was the worst-performing major currency against the dollar last year, has weakened even more to kick off 2026. On Wednesday, it fell to an 18-month low around 160 per dollar, territory that has previously prompted waves of yen-buying intervention from the Ministry of Finance.

There appears to be a disconnect here. Central bank interest rate hikes and rising bond yields should support the currency, right? 

That logic doesn't always hold, however, especially when Japan's unique debt dynamics and inflation history are taken into consideration.