Governor of the French Central Bank, François Villeroy de Galhau: The Middle East shock impacts all economies, and rising interest rates affect both strong and weak fiscal states alike

(1) Market analyst Jeremy Boulton stated that as market volatility rises and exchange rate fluctuations widen, currency carry trades are becoming increasingly vulnerable. (2) Adverse exchange rate movements may be sufficient to offset gains brought by favorable interest rate differentials, or even cause greater losses. (3) Some of the most popular carry trade currencies have already experienced substantial adverse price moves: since the outlook for a Federal Reserve rate hike in September became clear, the Mexican peso has fallen by as much as 9%, the South African rand has declined by over 5%, and the Hungarian forint has dropped by more than 7%. (4) Japan has taken measures to support the yen, leading to a slight appreciation, while a sharp sell-off in French bonds has hurt market confidence, dragging down the euro and boosting the Swiss franc. (5) This has further intensified the losses faced by carry trades that rely on stable market conditions. If the stock market undergoes further corrections, carry trades may face a collapse. (6) As investors take profits before year-end and amid the uncertainty of the US elections in November, equities and other risk assets may come under additional pressure.

Japan’s two largest securities firms expect the rally in the Japanese stock market to last a long time, through to 2027, but warn that a reversal in artificial intelligence (AI) investments could become the biggest potential threat. “Markets, share prices, and corporate earnings have all been strongly driven by AI investments,” Nomura CEO Kentaro Okuda said on Thursday. “If market sentiment towards AI shifts and this trend reverses, I believe it could pose a significant risk.” Akihiko Ogino, CEO of Daiwa Securities, expressed a similar opinion during the same discussion. Both executives forecast that the Nikkei 225 index will reach 80,000 points, though their timelines differ: Ogino expects the target to be achieved this year, while Okuda forecasts the index to reach around 75,000 points by the end of the year and surpass 80,000 by the end of 2027.

ING analyst Chris Turner stated that the Federal Reserve's September meeting minutes indicate the Fed still expects another interest rate hike this year, which continues to support the US dollar. Currently, the money market has priced in a 25 basis point rate hike in December and further policy tightening expected in 2027. ING believes that the market's expectations for rate hikes are overly aggressive, but a significant correction is unlikely in the short term. In addition, last night’s US 10-year Treasury auction performed strongly, with a high bid-to-cover ratio and robust indirect demand, indicating that as long as yields are high enough, there remains strong market demand for US Treasuries. This has provided solid support for the US dollar and has further boosted it in a somewhat challenging investment environment. Elevated US Treasury yields and increased market volatility have led to capital outflows from arbitrage trades, significantly impacting most Latin American currencies. Given the recent situation in Europe, we expect the US dollar to maintain its upward trend in the coming months.