Market Brief: Equity market snap-back fails to reverse the dollar's decline

Global equity indices are rebounding this morning after Citadel, Ken Griffin's investment firm, stepped in to acquire the portfolio of technology-focused fund Situational Awareness, which had come under extreme stress as declining valuations forced it to meet margin calls from its lenders. The rescue of 25-year-old* Leopold Aschenbrenner’s firm reduces the risk of a disorderly liquidation of artificial intelligence-related holdings and has supported a modest recovery in risk appetite.

The dollar—the principal beneficiary of the artificial-intelligence boom, buoyed by the concentration of investment in the US and strong foreign demand for related assets—is nonetheless struggling to find its footing. Chair Warsh's performance during Wednesday's post-decision press conference left investors questioning whether he is serious about bringing inflation down, and yesterday's data weakened the case for tightening. Although underlying household consumption and business investment remained solid, economic growth decelerated in the second quarter as imports widened the trade deficit. The year-over-year increase in the core personal consumption expenditures index—historically the Fed's preferred measure of inflation—eased to 3.3% in June from 3.4% in May, with the monthly reading slowing to just 0.1% from 0.3%, the most benign print in months. The currency is down 1% on a trade-weighted basis this week.

The rapid buildout of AI infrastructure in the US has driven technology investment's share of gross domestic product to record levels, surpassing those seen during the dotcom boom of the late 1990s. In our view, this is helping paper over weakness in other areas of the economy while widening trade deficits and effectively providing a demand-side stimulus for countries that supply the commodities and manufactured goods that go into data centres and related projects. We think the dollar could decline further as the market fervour cools and economic activity indicators soften.

Japan and South Korea launched a rare coordinated intervention in currency markets yesterday, apparently hoping to capitalise on the dollar's decline to squeeze short positions and stabilise exchange rates. Japanese data point to roughly ¥8.45tn ($52bn) in dollar sales during US trading hours, with Seoul believed to have acted alongside. The yen jumped more than 2.4%—its largest move in two years—and the won reached its strongest level in nine months. Japan's vice finance minister for international affairs, Atsushi Mimura, said Tokyo was receiving “support from the US that goes beyond simply moral support,” but the price action suggests that the Treasury has not yet put its balance sheet in play***—the yen is reverting lower and the won has given back some of its gains.

Separately, the Bank of Japan left its benchmark rate unchanged following last month's increase to a 31-year high, but warned that higher energy costs and artificial intelligence-related price effects could lift inflation above target, implicitly forcing a faster pace of normalisation. In the post-decision press conference, Governor Ueda told reporters the rate-setting committee would need to scrutinise upside price risks more carefully from the next meeting onward—language that stopped short of committing to a move but that has raised market-implied odds on an imminent hike. Investors expect the Bank to raise rates roughly every six months over the next two years, a pace sufficient to narrow differentials with other major currencies but not—in our opinion—enough to reverse the yen's long structural decline.

The euro is holding firm after bloc-wide inflation picked up last month, bolstering the case for more monetary tightening from the European Central Bank. Headline consumer prices rose 2.9% in the year to July, up from 2.8% a month earlier, while the core measure accelerated to 2.5% from 2.4% and services inflation climbed to 3.3%. This comes after data yesterday showed the economy expanding by 0.4% in the second quarter—twice as fast as expected—seemingly giving policymakers room to tighten without crushing growth. With policymakers warning that the full effects of the Iran war-driven energy shock have yet to play out, markets have two more quarter-point rate hikes priced in over the next year, with the first expected in September and a second by April.

A long weekend is upon us, but the August doldrums are not. This morning's Canadian gross domestic product figures and next week's employment data could shed light on the state of the economy ahead of another round of tariff increases. The coming days will also bring a raft of US activity and labour market indicators—including the July non-farm payrolls report—alongside a Mexican rate decision. Oil prices are vulnerable to further turbulence as the Trump administration tries to extricate itself from the conflict with Iran, and ructions in global equity markets show no sign of abating as investors continue to adjust their exposure to the technology sector. Enjoy the break, and prepare for more volatility on your return.

*It is easy to mock investors for their short memories**, but Aschenbrenner—who managed more than $45bn in investor money until a few weeks ago—does not remember the dotcom boom because he had not yet been born. Let that sink in for a moment.

**Financial market participants make goldfish look good by comparison.

***Scott Bessent, formerly of George Soros' acquaintance, is clearly itching to buy the yen, but the US Treasury has not yet completed its transition into becoming a full-fledged hedge fund****.

****The margin call thing may have something to do with this.

Market Overview

Data as of 7:15 AM EDT

Notes: DXY: Dollar index, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

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