Hong Kong Markets Rebound on Record Mainland Inflows

The Japanese yen has extended its slide against the US dollar after a clear signal from Washington: America will not step in to rescue the struggling currency. US Treasury Secretary Scott Bessent's recent comments have erased any lingering hopes of a coordinated intervention, highlighting a stark divergence in monetary strategy between the two economic powers.

For traders and analysts, this confirms that the yen's fate rests solely on the shoulders of Japanese policymakers, who are grappling with deep-seated economic challenges.

US Treasury Confirms "Strong Dollar" Stance

In an interview with CNBC, Treasury Secretary Scott Bessent explicitly ruled out any US action to prop up the Japanese yen. His statement was a direct refutation of rumors that had circulated the previous week suggesting a potential "rate check" between US and Japanese authorities—an action often seen as a precursor to market intervention.

Those rumors had caused a temporary sell-off in the US dollar. However, Bessent’s remarks prompted a swift rebound for the dollar, as he reaffirmed the administration's commitment to a "strong dollar policy." He explained this policy is about "setting the right fundamentals" to encourage capital flows into the US, making intervention in a foreign currency market a direct contradiction of that goal.

The Long-Term Strain on the Yen

The yen's current weakness is not a new phenomenon. It stems from years of loose monetary policy by the Bank of Japan (BOJ), which kept interest rates low to stimulate economic growth. This strategy stood in sharp contrast to the policies of other major economies like the United States.

This interest rate differential fueled the popular "yen carry trade." Investors would borrow yen at a very low cost, convert it into US dollars, and invest in higher-yielding American assets. However, this dynamic began to unravel dramatically.

In April 2024, the yen plummeted to its weakest level against the dollar since the early 1990s. The trigger was a BOJ interest rate hike that made the carry trade unprofitable. As investors rushed to exit their positions, they sold off massive amounts of yen, causing the currency to crash. The BOJ has struggled to stabilize the currency ever since.

Domestic Policies Magnify the Pressure

The situation has been compounded by domestic policy decisions. On January 13, 2026, the yen fell to its weakest point against the dollar since the summer of 2024. This decline was largely driven by market concerns over Prime Minister Sanae Takaichi's preference for loose monetary policy, which could expand Japan's already enormous national deficit.

Japan's debt-to-GDP ratio currently stands at over 230%, one of the highest among developed nations. Further fueling investor anxiety, the Takaichi administration approved a massive stimulus package that pushed yields on 40-year Japanese bonds to record highs. This move triggered significant capital flight from the Japanese bond market, placing the nation's economy in an even more precarious position.

Japan's 2026 Economic Outlook: A Balancing Act

Looking ahead, the path for Japan's economy remains challenging. A January report from Goldman Sachs projected moderate but steady growth of around 0.8% for 2026, driven primarily by domestic demand rather than exports. The report also forecasts inflation to remain near the 2% target.

Despite the recent stimulus package, Japan's debt-to-GDP ratio has seen a slight decline. However, planned government spending and the potential elimination of consumption taxes threaten to reverse this trend. If the Takaichi administration delays necessary interest rate adjustments, the BOJ may be forced to intervene.

Several key risks continue to undermine confidence in the Japanese economy:

• Fiscal Instability: Further increases in government spending could push the national debt higher.

• Demographic Headwinds: An aging population and persistent labor shortages could hinder long-term growth.

• Global Factors: Broader shifts in global trade and ongoing currency volatility remain significant external threats.

Tensions are escalating in the Middle East as the United States deploys an aircraft carrier and additional bombers to the region, positioning key military assets for a potential confrontation with Iran. Following President Donald Trump's threats to strike the Islamic Republic over its crackdown on protesters, analysts are assessing a critical question: how would Tehran respond?

Experts agree that Iran would be largely powerless to stop a direct American aerial attack. However, its defensive vulnerabilities are only half the story. Tehran possesses a formidable arsenal of missiles and drones, giving it significant capacity to retaliate against US military and commercial interests across the region.

Defensively Weak, Offensively Potent

Recent conflicts have exposed critical weaknesses in Iran's defenses. During a 12-day war last June, Israeli strikes hit Iranian military infrastructure, including missile production centers, radars, and Russian-made S-300 air-defense systems. With an aging air force, these attacks left Iran's ability to fend off aerial assaults severely weakened.

"In terms of purely defensive capabilities, Iran is practically naked," said Michael Horowitz, an independent defense expert based in Israel.

Despite this, Iran demonstrated its offensive strength by firing hundreds of ballistic missiles at Israel during that same conflict, with dozens penetrating Israel's advanced air defenses to hit military sites.

This offensive power remains the core of its strategy. "Iran still has a large arsenal of short and medium range missiles that can easily hit US bases in the Middle East, as well as cruise missiles and drones that it would likely use to try and target US ships," Horowitz added.

A Closer Look at Iran's Missile Arsenal

To understand Iran's retaliatory threat, it's essential to break down its missile capabilities. Israel's strikes in June specifically targeted production facilities at the Parchin military complex, the Khojir military base, and the Shahrud missile site to hinder the development of medium-range ballistic missiles.

According to Sascha Bruchmann, a military analyst at the International Institute for Strategic Studies, these missiles are "fairly potent" but have a key weakness.

• Medium-Range Ballistic Missiles: Many are liquid-fueled and depend on fixed infrastructure for loading and launch. This makes their launchers easier to find and destroy, as Israel demonstrated during the war. The number of operational launchers remaining is unclear.

• Short-Range Ballistic Missiles: These weapons pose a more immediate and flexible danger. Bruchmann notes that Tehran has several thousand of these missiles, which are often solid-fueled, making them more mobile and harder to detect before launch. He warns they "constitute a real threat, especially for the smaller Gulf countries" like Qatar and Bahrain, which both host significant US military forces.

Iran's ballistic missile systems form the core of its asymmetric warfare and retaliatory capabilities.

The Strait of Hormuz: Iran's Economic Weapon

Beyond its conventional weapons, Iran's most powerful tool may be its ability to disrupt the global economy. The Persian Gulf region produces approximately 40% of the world's oil, and about one-fifth of the entire world's supply flows through the Strait of Hormuz—a narrow waterway Iran can threaten to close.

"The Islamic republic has long prepared a set of military assets meant to shut down this key maritime route," Horowitz explained. "This would create an economic shock that Iran could exploit."

Analyzing US Military Options and Potential Outcomes

According to US media reports, President Trump is weighing a range of military options in response to Iran's crackdown on protests, which saw authorities kill thousands of people. These options reportedly include:

• Strikes on largely symbolic targets.

• "Decapitation" strikes targeting Supreme Leader Ayatollah Ali Khamenei.

• A sustained bombing campaign against military and security infrastructure.

Experts warn that any US military action is fraught with risk and could easily trigger a full-blown regional conflict. The ultimate goal of a potential strike also remains unclear—whether it is to force regime change, encourage defections, or simply bring a weakened Tehran back to the negotiating table.

Most analysts agree that an aerial campaign alone, without a ground invasion, is unlikely to topple the regime. A ground war in Iran, the largest and most populous country in the Middle East, is widely considered a non-starter. Even a sustained US air campaign, which Trump reportedly wishes to avoid in favor of a limited attack, would not guarantee the regime's fall.

"A sustained US air campaign could severely degrade Iran's conventional military by ripping up command-and-control, and fixed infrastructure," said Horowitz. "But it is unlikely by itself to produce the collapse of Iran's security forces, which can disperse, hide, and shift to low-signature internal repression."

The bottom line, he adds, is that "airpower can punish and paralyze, but it would need a simultaneous political fracture on the ground...to really deliver a full collapse."

U.S. Treasury yields pushed higher on Wednesday after the Federal Reserve concluded its two-day meeting, leaving interest rates unchanged but signaling that its fight against inflation is not over.

The central bank held its key policy rate in the 3.50%-3.75% range, a move that was widely anticipated by markets. However, the Federal Open Market Committee (FOMC) statement noted that inflation remains elevated and tweaked its language on the jobs market, suggesting policymakers are growing more confident in the economy's resilience.

Fed Signals Confidence in a Stabilizing Labor Market

In its official statement, the FOMC noted that "job gains have remained low" but removed previous language highlighting rising downside risks to employment. This subtle shift indicates that the Fed is less concerned about a potential deterioration in the labor market.

Dario Perkins, managing director for global macro at TS Lombard, described the announcement as an "absolute snoozefest" but labeled the statement "slightly hawkish."

"The only noteworthy point came from a slight upgrading of how the FOMC perceives the labor market," Perkins explained. "The jobs data have stabilized and that has made officials less anxious about 'stalling'."

Powell's Hawkish Tone Shifts Rate Cut Expectations

Fed Chair Jerome Powell reinforced this message during his press conference, adopting a hawkish tone while reiterating that a rate hike is not the committee's baseline expectation. He emphasized that upside risks to inflation and downside risks to employment have both eased, positioning the Fed to react to future data as needed.

The market reacted immediately to the Fed's confident stance.

• The benchmark 10-year Treasury yield rose 2.8 basis points to 4.249%.

• The 30-year Treasury yield increased by 2.6 basis points to 4.860%.

• The 2-year Treasury yield, which is highly sensitive to interest rate expectations, climbed 1.6 basis points to 3.585%.

Following the decision, interest rate futures adjusted, pricing in approximately 46 basis points of easing for 2026. This implies fewer than two standard quarter-point rate cuts, a decrease from the 53 basis points of cuts priced in just two weeks ago.

Chris Grisanti, chief market strategist at Mai Capital Management, suggested a more aggressive outlook. "With the market strong and the economy strengthening, I think there may be no cuts in 2026," he commented.

Dissent Emerges as Yield Curve Flattens

The decision to hold rates was not unanimous. Governor Christopher Waller and Governor Stephen Miran both dissented, advocating for a quarter-percentage-point rate cut. This dissent highlights a division within the Fed on the appropriate path forward.

The bond market's yield curve, a key indicator of economic expectations, also reacted to the news. The spread between 2-year and 10-year Treasury yields narrowed from 66.6 basis points to 65.2 basis points, a slight flattening. Earlier in the day, the curve had steepened to 67.8 basis points amid concerns about inflation linked to a declining dollar—a move seemingly encouraged by President Donald Trump. However, Treasury Secretary Scott Bessent later reaffirmed the administration's strong-dollar policy, calming those fears.

With the FOMC meeting concluded, market attention is turning to the future leadership of the central bank. Matthias Scheiber, head of the multi-asset team at Allspring Global Investments, noted that the announcement of the next Fed chair will be a major focus, with the race considered "wide open." The general expectation is that a more dovish successor will replace Powell when his term ends in May.

'SERIOUS CONVERSATIONS'

Source: Reuters

Jan 28 (Reuters) - Gold prices climbed above $5,300 per ounce for the first time on Wednesday, propelled by economic and geopolitical uncertainty, while markets absorbed the Federal Reserve's latest rate verdict.

Spot gold was up 2.2% at $5,301.60 an ounce by 2:40 p.m. ET (1940 GMT) after touching a record $5,325.56.

U.S. gold futures for February settled 4.3% higher at $5,303.60.

"The rally in the precious metals have kind of taken on a life of their own at this point," said Peter Grant, vice president and senior metals strategist at Zaner Metals.

Gold remains overbought and vulnerable to a correction, but strong buying interest during dips continues to favor the upside, with the next target projected at $5,400, Grant added.

The Fed held interest rates steady, citing still-elevated inflation alongside solid economic growth, but gave little indication in its latest policy statement of when borrowing costs might fall again.

Both Governor Christopher Waller, a contender to replace Fed Chair Jerome Powell when his term as central bank chief ends in May, and Governor Stephen Miran, on leave from his job as an economic adviser at the White House, dissented in favor of a quarter-percentage-point rate cut.

"Markets are just oscillating after the Fed statement... No suggestion that the Fed is in any hurry to move again," said Tai Wong, an independent metals trader.

Powell said inflation in December was likely still well above the central bank's 2% target. U.S. President Donald Trump said on Tuesday he would soon announce his pick to replace Powell.

Gold, a safe-haven asset that does not yield interest, typically performs well during periods of low rates. It has gained more than 20% since the start of the year, building on last year's record gains.

Meanwhile, crypto group Tether plans to allocate 10%–15% of its investment portfolio to physical gold, its CEO Paolo Ardoino said, adding to the bullion which it says already backs some of its products.

Spot silver rose 0.7% to $113.78 an ounce after hitting a record high of $117.69 on Monday. Prices gained nearly 60% so far this year.

"Number of silver indicators suggest prices may be due a correction in the short term," analysts at Standard Chartered said in a note.

Spot platinum fell 1% to $2,612.81, having hit a record $2,918.80 on Monday, while palladium rose 3.9% to $2,009.69.

Source: Reuters

Federal Reserve Chair Jerome Powell has offered his first public defense for attending a Supreme Court hearing concerning Fed Governor Lisa Cook, calling the case a pivotal moment for the central bank's independence.

Speaking at his press conference on Wednesday, Powell framed his controversial decision as a necessary stand. "That case is perhaps the most important legal case in the Fed's 113-year history," he stated. "As I thought about it, I thought it might be hard to explain why I didn't attend."

Federal Reserve Chair Jerome Powell addresses the media, explaining his decision to attend a crucial Supreme Court hearing.

Powell's presence at the opening arguments last week drew criticism, most notably from Treasury Secretary Scott Bessent, who called the move a "mistake" that politicized the case.

The Supreme Court Showdown Over a Fed Governor

The legal battle centers on whether President Donald Trump has the authority to fire Cook. This question has significant implications for a president's ability to remove central bank officials and exert control over monetary policy.

During the hearing, Supreme Court justices appeared skeptical of the claim that Trump was within his powers to remove Cook. Trump has officially cited mortgage fraud allegations as the reason for his action, but critics believe the move is linked to his public push for lower interest rates. The Supreme Court had previously allowed Cook to remain in her position while awaiting the oral arguments.

A Two-Pronged Threat to Fed Autonomy

The attempted removal of Cook is not the only source of political pressure on the central bank. Earlier this month, Powell revealed he is facing a federal probe related to renovations at the Fed's headquarters.

Many observers have connected this investigation to Trump's repeated criticism of Powell for not cutting interest rates more quickly. Together, the criminal investigation and the attempt to oust a governor have fueled concerns that the Federal Reserve's long-held apolitical status is under threat.

Why Independence Matters

During Wednesday's press conference, Powell emphasized that political separation is essential for the Fed's long-term credibility.

"The point of independence is not to protect policymakers or anything like that," Powell explained. "It just is that every advanced economy (and) democracy in the world has come around to this common practice."

He warned that if the central bank loses that separation, "it would be hard to restore the credibility of the institution."

With his own term as chair ending in May, Powell's comments carried an additional weight. He concluded with pointed advice for whoever might take his place next.

"Don't get pulled into elected politics," Powell urged. "Don't do it."