Author: Igor Kuchma

Although the surge in USD/JPY forced the Bank of Japan to raise its 2026 core inflation forecast from 2.0% to 2.2% — technically signaling the need for more aggressive rate hikes — the BoJ kept its policy rate unchanged at 0.75% last Friday.

This lack of resolve reflects how limited the BoJ’s room to maneuver really is. Raising rates faster than 25 basis points every six months would pose serious risks to Japan’s financial system. Just to put this into context, in 2025, debt servicing accounted for approximately 24.5% of the government’s budget.

For the same reason, the Bank of Japan merely reiterated that real interest rates remain deeply negative and that, if its growth and inflation forecasts prove accurate, it will continue to raise official interest rates only gradually, without offering any specific guidance.

Why did the yen strengthen then?

Apparently, the BoJ may have intervened in the currency market for the first time since July 2024, potentially in coordination with the US, if reports are true that the New York Federal Reserve conducted rate checks on USD/JPY around midday on Friday, asking traders at what levels the pair would trade if it entered the market.

The problem is that any Japanese intervention would almost certainly be only a temporary solution. The underlying structural problems remain unresolved: a huge public debt burden and a prime minister firmly committed to fiscal expansion.

If Japan fails to stabilize the situation, it could be forced to sell some of its US Treasury holdings, which would put upward pressure on US yields. At the same time, unwinding the yen carry trade — borrowing yen to invest in risky assets — could trigger a sharp rise in volatility, much as markets experienced in 2024 after the Bank of Japan’s surprise rate hike.

Finally, yet importantly, if the US ultimately decides to actively support the yen, the added pressure on the US dollar index could give gold another boost.

For a long time, Kevin Hassett, one of Trump’s most loyal allies and a staunch advocate of faster interest rate cuts, was considered by many to be the leading candidate to replace Jerome Powell as Fed chair. However, the markets were not very enthusiastic about this idea. Hassett’s appointment would have been seen as a direct blow to the Fed’s institutional independence, which is why the DXY came under pressure.

Last week, though, Hassett’s chances dropped sharply, and a new alternative emerged on the horizon: Kevin Warsh. This came after Donald Trump commented that he values Hassett’s role in the White House and does not want to lose him. Apparently, the president was advised that it would be more difficult for Congress to approve Hassett’s appointment and that the markets would likely react more favorably to Warsh’s nomination.

Would Warsh submit to Trump’s wishes?

Given the US president’s December statement that “anyone who disagrees” with him would never head the Federal Reserve, the answer would appear to be yes. However, although Warsh also favors rate cuts, institutional credibility is not a secondary concern for him. That means Warsh is much less likely to implement policies by presidential order. His decisions would be based on macroeconomic data, not political pressure.

And for now the macro backdrop argues for patience:

Inflation remains contained, albeit persistent, with December CPI meeting expectations at 0.3% month-on-month and 2.7% year-on-year, while core inflation came in below forecasts at 0.2% month-on-month and 2.6% year-on-year.

 On the other hand, the labor market continues to show resilience. Initial jobless claims fell unexpectedly, dropping by 9,000 to 198,000 in the week ending January 10, below the Reuters consensus of 215,000.

This helps explain the strengthening of the US dollar index last week, even despite President Trump’s statements on Greenland and the deterioration of relations with the EU.

Under the banner of fighting drug cartels — and alongside invoking the Monroe Doctrine, which asserts a U.S. right to an exclusive sphere of influence across the Western Hemisphere — the U.S. carried out a special operation in Venezuela. Soon after, U.S. authorities began seizing tankers suspected of transporting Venezuelan oil, even when they were sailing under foreign flags.

Naturally, this sparked concerns that oil prices could slide. After all, Venezuela holds the largest proven oil reserves in the world, and a sudden return of its crude to global markets could sharply boost supply. In reality, however, that didn’t happen. While crude oil prices did start the year lower, they quickly recovered, and by Monday, Brent crude was trading above $62 per barrel.

What explains this resilience?

First, despite its vast reserves, Venezuela simply cannot flood the market overnight. Years of sanctions have left the country’s oil industry in serious decline. Restoring production will require hundreds of millions of dollars in investment, as well as time.

Furthermore, most of Venezuela’s oil reserves are located in the Orinoco Belt and are classified as heavy or extra-heavy crude. Extracting them is costly and technically difficult. According to some estimates, the break-even price of Venezuelan oil would have to be at least $80 per barrel for production to be economically viable. No wonder, during a recent meeting between Donald Trump and representatives of the oil and gas industry, the CEO of ExxonMobil said the Venezuelan market is “uninvestable” in its current state.

At the same time, tensions are rising in the Middle East, especially in Iran.

The country is facing new protests as the rial continues to fall and inflation remains high. The demonstrations are becoming political, with Tehran blaming the U.S. and Israel for stirring unrest. If the situation worsens and the U.S. intervenes, Iranian oil supplies could be disrupted, potentially tightening the global market.

The good news for those hoping for lower oil prices is that Goldman Sachs still expects average Brent and WTI prices in 2026 to be $56 and $52 per barrel, respectively, as oil reserves continue to rise in OECD countries.

The 19th-century idea of “America for Americans” is back in the spotlight. Washington seems to be reaffirming its claim to control political and economic processes in the Western Hemisphere, drawing a clear red line against foreign powers such as China and Russia.

The first move under this renewed approach wasn’t a behind-the-scenes regime change through a so-called “color revolution,” but a military operation in Venezuela, involving the abduction of the president and his wife. And judging by Trump’s comments, interventions in Cuba, Colombia, or even Mexico could follow.

The ethics of this move remain a matter for Congress to debate, but several countries have already openly condemned it. Whether those objections matter is another question. What matters is that, historically, U.S. interventions in the region have rarely improved living standards.

What about the markets?

On the one hand, rising geopolitical tensions could boost demand for safe-haven assets, especially non-dollar assets such as gold (XAUUSD). Silver (XAGUSD), platinum (XPTUSD), and other precious metals could follow. In fact, they already opened higher on Monday.

As for the oil market, a sharp drop in prices is far from guaranteed. 

Although Trump has never hidden his interest in Venezuela’s vast mineral and oil reserves — or his belief that U.S. oil companies were unfairly pushed out after the industry was nationalized — Venezuela’s oil infrastructure is largely in disrepair, and the regulatory environment remains uncertain. As a result, despite holding the world’s largest proven reserves, it is unlikely that Venezuelan oil will return to global markets in significant volumes in the short to medium term, limiting its ability to meaningfully influence global supply or ease upward pressure on oil prices.

When it comes to the stock market, assuming the U.S. has achieved its objectives and no further operations in Venezuela are planned, this could actually be a mildly positive factor for the S&P 500. Historically, however, the index’s reaction to U.S. interventions in Latin America has been relatively limited.

That said, it all depends on how the situation evolves. What would happen if China decided to intervene? Or if Latin American countries attempted a coordinated response?

Here we are on the last Monday of the year. While the S&P 500, NASDAQ, Dow Jones, and even gold (XAUUSD) have all posted solid gains since the start of 2025, calling the year “calm” would be a stretch — especially on the geopolitical front. There are some signs of easing tensions, but it’s far too early to declare a new era of peace.

For instance, according to CNN, the Israeli prime minister will meet with Trump to request approval for another operation in Gaza. Meanwhile, there are signs of progress in the conflict between Russia and Ukraine, which has led to a brief decline in precious metals, but the most difficult part is yet to come.

Markets, however, don’t seem too worried about the uncertain prospects for geopolitical de-escalation. Risk assets continue to trend upwards, and according to investment bank forecasts, optimism appears poised to persist into next year. The average year-end 2026 target for the S&P 500 among major strategists stands at 7,555. 

One of the key drivers is expected to be a still-strong economy, which supports corporate profits.

In this regard, in the third quarter, US GDP grew by 1.1% quarter-on-quarter, 2.3% year-on-year, with consumer spending contributing 2.4 percentage points to growth, led by services. The challenge is that, with such strength, the Fed has less incentive to cut rates, so Treasury yields are not falling rapidly.

Looking at this week, the holiday schedule — including the New Year’s closure — means things are likely to be quiet. The main focus will be on November’s housing market data, the release of the minutes from the latest Fed meeting, and weekly jobless claims – with the latter two crucial for understanding future rate moves.

Looking ahead to this week, given the holiday calendar, things are likely to be quiet. Attention will mainly focus on November’s real estate market data, the release of the minutes from the Fed’s latest meeting, and weekly unemployment claims, with the latter two being key to understanding future interest rate movements.

If the situation continues to evolve according to a more positive scenario, i.e., if the labor market deteriorates but not at a rapid pace, it is unlikely that the regulator will rush to lower interest rates. For gold, in particular, this may not be the best news, and the opposite could happen with the dollar index.

Alongside U.S. macroeconomic data, which did come as a surprise, particularly on the inflation front, as CPI undershot expectations and fell back to levels last seen in March 2021 (consensus had forecast core CPI at 3.0%, while the actual reading came in at 2.6%), last week was packed with central bank meetings. 

The most closely watched one was that of the Bank of Japan. The concern was that further monetary tightening could disrupt the yen carry trade, potentially triggering margin calls and forced selling — similar to the turmoil seen last July, when the BOJ unexpectedly raised rates by 15 basis points to 0.25%, renewing volatility in USD JPY.

In practice, however, those fears haven’t materialized — at least not yet.

After the Japanese central bank raised its official interest rate from 0.5% to 0.75% and signaled that further increases remain possible as long as economic conditions remain stable, the yield on 10-year Japanese government bonds rose above 2%, the yen weakened to around 157 per dollar, and the Nikkei 225 rebounded.

In the United States, markets remained relatively calm. 

The S&P 500 ended the week largely unchanged (+0.1%), while the Nasdaq rose 0.5%, despite ongoing concerns over high valuations in the tech sector. The muted reaction suggests that markets had already priced in the possibility of a rate hike, so much of the adjustment had already taken place.

Now, even if some downward pressure emerges in the short term, its overall impact is likely to be limited. This is because, with each additional rate hike by the Bank of Japan, the adverse effect on markets tends to fade as the yen carry trade loses its appeal, which, in theory, should reduce the risk of large-scale forced selling.

Elsewhere, the Bank of England cut its policy rate by 25 basis points to 3.75%, keeping the door open for further easing. At the same time, the European Central Bank held its deposit rate at 2% and signaled that no additional rate cuts are expected in 2026, which helped drive a rise in the EUR USD pair.

Many were hoping that a strong earnings report from Nvidia would help turn sentiment around. The company’s numbers for Q3 FY2026 indeed didn’t disappoint, yet the S&P 500 index is still on track for its worst November since 2008.

So what’s going on?

First, let’s talk about Nvidia’s results. Revenue hit $57 billion, up 22% from last quarter and 62% from a year ago. But most importantly, the company expects around $65 billion in revenue next quarter.

Furthermore, Nvidia CEO Jensen Huang argued that AI demand is real: companies are moving to GPUs, new AI applications are emerging, and “agentic AI” will need even more computing power. 

The takeaway, thus, is that Nvidia stock price growth is driven by structural shifts in AI, not hype.

So why didn’t the indexes soar?

Because uncertainty remains.

In particular, there’s still no clarity on how long Nvidia can sustain this kind of explosive growth. Infrastructure constraints and a heavy reliance on a few major customers raise concerns, especially at a time when consumer sentiment is deteriorating.

On top of that, the broader fear of an AI bubble hasn’t gone away. Investors see companies boosting their CAPEX just to stay competitive, in some cases relying on debt to do so — for example, Oracle. Finally, there is a worry that weakness in just one key player could ripple across the entire sector, and let’s not forget about still-high valuations.

As a result, investors have been trimming their exposure to riskier assets, including Bitcoin, which last week dropped to nearly $80,000.

And then there’s the rapid deterioration of U.S. liquidity. Repo rates are climbing, reverse repo balances are plunging, and funding costs for banks and hedge funds are spiking. If leveraged investors are forced to unwind positions, it could lead to waves of forced selling, creating a domino effect across the market.

Whether this will lead to an already long-forecasted market crash depends, of course, on how circumstances unfold. One of the factors to watch will be macro data in the U.S. and Fed rhetoric, especially regarding liquidity issues.

There’s less than a month left until the Fed’s final meeting of the year, and investors’ hopes for another rate cut are fading fast, at least according to the CME FedWatch Tool. Back in October, markets were pricing in almost a 100% chance of a cut; now that probability has dropped below 45%.

Even the end of the longest U.S. government shutdown in history didn’t help, and no wonder. Since no data was collected during that period, we won’t receive a flood of new reports, which means the Fed will have little new information on which to base its monetary policy decisions.

The rhetoric of Fed officials doesn’t help. For instance, the Kansas City Fed President warned that further rate cuts could entrench higher inflation rather than support the labor market. Meanwhile, Cleveland Fed President Beth Hammack indicated that she does not favor another rate cut in the near term.

This week, the speakers include Philip Jefferson, Christopher Waller, Michael Barr, Stephen Miran, and Lisa Cook. If they collectively signal that inflation concerns outweigh worries about slowing employment, risk appetite could continue to decline, hurting the S&P 500 index along the way.

The same story applies to the minutes from the last FOMC meeting. 

With Chair Powell making it clear in the press conference that we shouldn’t assume a December rate cut, the minutes are likely to come across as hawkish. As for the long-delayed September jobs report, which is set to be released this week, its impact should be fairly limited given that the data is already somewhat outdated.

Last but not least, the fact that Trump went “TACO” again and exempted food products from tariffs could actually be a worrying sign. At first glance, it appears to be a move to curb inflation and support purchasing power. But it might really suggest that everyday consumers are feeling significant pressure.

The good news is that expectations for rate cuts have dropped quickly, although they could rise just as fast.

The week kicked off on an upbeat note for the markets. 

What initially appeared to be the start of a correction in the S&P 500 and Nasdaq barely took off. Buoyed by hopes of a quick end to the record US government shutdown and Trump’s tweet hinting at “dividends” for Americans financed by trade tariffs, sentiment had already returned to risk-on by Monday.

But how solid are these drivers in the long term?

Starting with Trump’s proposal of an equivalent to helicopter money, “saying it doesn’t mean doing it.” Some suggest it may have been aimed more at boosting market confidence — and perhaps bolstering his own declining popularity — than signaling real action. Optimism based purely on expectations could be fleeting.

Given the fact that tariffs are basically an import tax, borne mainly by U.S. companies and consumers, what Trump called a “dividend” is more like government-backed cashback. The inflationary pressures that come with tariffs will not disappear.  Markets would gain much more confidence if tariffs were actually eliminated. 

As for the shutdown, Democrats caved, and the Senate passed a bill to end the longest shutdown in U.S. history. The bill, pending House approval, would fund the government through January 30, 2026, reinstate furloughed employees, and guarantee back pay. Most of this is likely already priced in by the market.

So, have the markets peaked?

That depends on how circumstances evolve. Optimism is also riding on hopes for a more dovish Fed amid a cooling labor market. In October, U.S. companies cut 153,000 jobs, almost triple last year’s number. Tech and logistics layoffs pushed total job losses in 2025 past one million, the highest since the pandemic.

If Fed members signal in upcoming speeches that a larger rate cut may be necessary at the December meeting, it could boost not only gold prices but also overall market sentiment. On the other hand, if they insist that more data is needed before taking action, risk appetite could cool, punishing risky assets.

Unlike XAUUSD or the S&P 500, which have risen since the start of the year, oil prices have dropped nearly 15%, putting producers in a challenging, though not critical, position. The issue isn’t weak energy demand; on the contrary, demand remains strong, especially with the growth of artificial intelligence. The real problem is oversupply, with forecasts even pointing to a potential surplus.

For example, the IEA predicts a surplus of 4 million barrels per day by 2026. According to Vortexa, oil tankers are currently carrying a record 1.3 billion barrels at sea. Even OPEC+ acknowledges the market is entering an oversupply situation, despite tighter U.S. sanctions on Russian oil.

So, is there any chance that the trend will reverse?

Fundamentals suggest it might.

It all begins with OPEC+’s decision to slow the pace of production increases next year. Specifically, eight member countries plan to add about 137,000 barrels per day in December, then pause any further increases in January, February, and March. Officially, this is attributed to the usual seasonal dip in demand, but it also seems intended to ease concerns about oversupply.

Geopolitics could also push prices higher. In particular, a potential U.S. military operation in Venezuela could have a significant impact, given that Caracas produced 1 million barrels per day in September. President Trump has also raised the possibility of sending troops to Nigeria, one of Africa’s largest oil producers, or even carrying out airstrikes. Meanwhile, in the Middle East Iran remains a black swan.

Finally, oil could benefit from the global economy’s resilience. According to World Economics, the Global Sales Managers’ Index reached 51.5 points in October, signaling moderate expansion. While 57% of companies (28 out of 49) have issued negative EPS guidance for Q4 2025,matching the five-year average but below the ten-year average of 61%, this suggests that corporate outlooks aren’t overly pessimistic.