Rate cuts here, rate cuts there. But how about talking rate hikes for a change? That was seemingly the market's new fascination yesterday, with an unexpected focus: Japanese government bonds. Granted, it doesn't sound particularly thrilling at first glance. And yet, the consequences trickled through the financial system all the way to cryptocurrencies. I’m referring to the kind of interconnected vessels finance is full of, rarely visible but occasionally decisive.

The latest auction of 10-year Japanese government bonds unfolded in a rather tense atmosphere. Behind the scenes: mounting speculation around a possible rate hike from the Bank of Japan, fuelled by unusually blunt comments from its Governor, Kazuo Ueda.

This prospect of monetary tightening casts a shadow over one of the most unassuming strategies in modern finance: the carry trade. To recap briefly, the BOJ’s ultra-accommodative stance (zero rates, massive asset purchases, volatility suppression) has long provided cheap fuel for investors. Borrowing at minimal cost in yen allowed them to finance more profitable positions elsewhere, whether relatively safe (US Treasuries) or riskier bets such as tech stocks or cryptocurrencies. As long as the BOJ stayed put, the arbitrage appeared endless, even structural.

But the mere hint of a rate hike threatens to dismantle the entire edifice. If borrowing in yen suddenly becomes more expensive, the appeal of cheap leverage to fund investments elsewhere begins to erode. Worse still, there could be a double hit: higher financing costs (immediate burden due to rate increases) coupled with a strengthening yen (currency losses upon repayment).

Mechanically, the riskiest positions financed via carry trade start to unwind - and quickly, to avoid triggering a chain reaction. This risk is a regular background feature of markets, but rarely materialises. When it does, however, the fallout tends to be sharp. Back in August 2024, even the faintest whiff of monetary tightening in Tokyo sparked a brutal correction across markets and various asset classes.

Now, in early December, Kazuo Ueda has rekindled memories of last summer. The probability of a rate hike at the Bank of Japan's 20 December meeting has jumped from under 40% to around 80% within days. And if not in December, traders expect it in January. So once again, the carry trade is stirring passions and provoking a mild bout of market risk aversion. The tremors are felt in risk assets, but also manifest in a butterfly effect on government bonds, especially US Treasuries, which are a key component of carry trade strategies due to their liquidity. Yesterday, the yield on the US 10-year rose from just under 4% to 4.1% for precisely this reason.

In short, Wall Street is keeping a watchful eye on Japanese monetary policy, though it hasn't altered expectations for the Federal Reserve's next move. The market remains convinced that the Fed will cut rates in eight days, responding to an American economy that continues to show diffuse signs of softness, if not outright slowdown.

Market sentiment was gloomy enough yesterday to halt the S&P 500's upward streak, which slipped 0.5%. Given the effort expended in late November to erase earlier monthly losses, a pause is not altogether surprising. Historical patterns show that the so-called Santa Claus rally often takes time to gain traction, typically focusing on the week leading up to Christmas. In Europe too, most indices ended their winning runs, though with relatively minor declines.

Elsewhere on the agenda, investors will eye eurozone inflation figures for November, due later this morning. For those missing tech earnings season, cybersecurity specialist CrowdStrike is in the spotlight after Wall Street's close, reporting Q3 results for its off-cycle fiscal year. And as I haven’t mentioned a record in the past 24 hours, note that silver flirted with USD 59 an ounce during yesterday's session - a new high, bringing its 2025 gains to over 100%. The precious metal has eased slightly this morning but continues to outshine gold, which is up a mere 61% year-to-date.

In Asia-Pacific, markets are somewhat mixed. Japan is flat, while South Korea gained 2% following confirmation from the United States of tariff reductions for the country. Mainland China, Hong Kong, and India saw moderate declines. Australia fared better, adding 0.2%. European futures are indecisive, with a slight bearish tilt imported from the United States.

Today's economic highlights:

On today's agenda: the Eurozone's CPI and unemployment rate; in the United States, the JOLTS job openings will be released. See the full calendar here.

  • GBP / USD: US$1.32
  • Gold: US$4,214.71
  • Crude Oil (BRENT): US$63.2
  • United States 10 years: 4.05%
  • BITCOIN: US$87,023.2

In corporate news:

  • Vast Resources reports promising initial results from early diamond tender.
  • Ninety One PLC sees increased investment from Forty Two Point Two with additional 378,426 shares purchased.
  • Hardide stock surges after new order from energy sector.
  • FTSE 100 and FTSE 250 indices decline due to losses in industrial sectors amid global risk-averse sentiment.
  • Shopify faces major outage affecting thousands during Cyber Monday.
  • BP plc resumes operations of Olympic Pipeline after leak in Washington.
  • Netflix submits predominantly cash acquisition offer for Warner Bros. Discovery.
  • Apple defies India's directive to pre-install Sanchar Saathi app due to privacy concerns.
  • Nvidia invests $2 billion in Synopsys for AI integration in chip-design, amidst concerns about circular financing.
  • Holcim advances circular construction strategy with acquisition of three European recycling firms.
  • Bayer  manages litigation strategy by 2026, gains U.S. Solicitor General's support for Supreme Court review.
  • Vestas expands onshore blade factory capacity in Poland to double production.
  • Banco Santander sells 3.5% stake in Santander Bank Polska, aiming to raise approximately $480 million.
  • Azrieli Group announces secondary accelerated book-built offering of 1.5 million shares.

See more news from UK listed companies here

Analyst Recommendations:

  • Diploma Plc: Investec maintains its buy recommendation and raises the target price from GBX 5800 to GBX 6000.
  • Vodafone Group Plc: BNP Paribas maintains its underperform recommendation and raises the target price from GBX 60 to GBX 80.
  • Auction Technology Group Plc: RBC Capital maintains its sector perform recommendation and reduces the target price from GBX 415 to GBX 310.
  • Pan African Resources Plc: Peel Hunt maintains its buy recommendation and raises the target price from GBP 1.25 to GBP 1.30.
  • Serica Energy Plc: Panmure Liberum maintains its buy recommendation and reduces the target price from GBX 270 to GBX 238.
  • Watches Of Switzerland Group Plc: RBC Capital maintains its sector perform recommendation and raises the target price from GBX 400 to GBX 460.
  • British Land Company Plc: Panmure Liberum upgrades to buy from hold and raises the target price from GBX 424 to GBX 490.
  • Greatland Gold: Canaccord Genuity maintains its buy recommendation and raises the target price from AUD 10.65 to AUD 11.55.
  • Flutter Entertainment Plc: JP Morgan maintains its overweight recommendation and reduces the target price from GBP 271 to GBP 253.
  • Entain Plc: JP Morgan upgrades to overweight from neutral and reduces the target price from GBP 11.50 to GBP 10.90.
  • Whitbread Plc: JP Morgan maintains its neutral recommendation and reduces the target price from GBP 29 to GBP 24.50.
  • Standard Chartered Plc: JP Morgan maintains its overweight recommendation and raises the target price from GBP 17.70 to GBP 18.80.
  • Rio Tinto Plc: Macquarie maintains its neutral recommendation and raises the target price from GBP 46 to GBP 50.
  • Barclays Plc: Zacks maintains its neutral recommendation and raises the target price from USD 23 to USD 24.