LOCKED MI2 Trader: GBPJPY
Comment In quiet summer markets, it’s tempting just to sit back and relax. However, once in a while, decent risk-reward trades present themselves, and it
July 22, 2025
Comment In quiet summer markets, it’s tempting just to sit back and relax. However, once in a while, decent risk-reward trades present themselves, and it
While the Ruling LDP/Komeito Coalition has lost its majority, the odds favor Ishiba remaining as Prime Minister. For one, the job is a poisoned chalice, and practicality would suggest keeping him in place to complete the trade negotiations with the US. Additionally, there is no guarantee that the LDP can elect another candidate, given that it will be trying to govern with a minority in both houses. The DPP made major gains, but the next lower house elections will be key. The bottom line is that our conclusion has not changed: policy is likely to remain unchanged despite the fiery rhetoric.
The Weekly Lens aims to give you a concise sense of MI2 internal discussions over the week. It reflects what we have been reading and discussing, and how those discussions are influencing our view of the macro environment. We hope to give you some idea of how our thinking is evolving.
At the start of the year, we highlighted that after only the fifth time of 20% back-to-back gains in the S&P, analysts’ expectations for another 12% gain in 2025 were overly optimistic. That’s because in three of the prior occasions, when we had a similar setup, the index declined the next two years.
Japanese capital flows have long been a major driver of global yields, which is why global bond investors have been increasingly concerned about easy money policies and increasingly dysfunctional politics. The combination has prompted a renewed bout of concerns that the JGB market could “blow up the world”. But with inflation peaking and signs of potential political stalemate the worst may be already be priced.
The Weekly Lens aims to give you a concise sense of MI2 internal discussions over the week. It reflects what we have been reading and discussing, and how those discussions are influencing our view of the macro environment. We hope to give you some idea of how our thinking is evolving.
According to the economic textbooks, trend GDP in an economy is determined by the growth in the working population plus productivity. Therefore, until AI delivers, cutting rates in the US with unemployment well below NAIRU, and where immigration has accounted for 75% of labour force growth over the last few years, is playing with inflation fire
A key component of US Exceptionalism is the reflexive cycle between US asset prices and the economy. As the current account deficit has risen parabolically since 2020, the necessary offsetting rise in the US’s capital account surplus has been funded via foreigners lending money to the US government, or buying US assets. The recent break in the DXY, suggests that foreign appetite for US assets is ebbing. This is happening just as we are getting evidence of increasing fragility in the US Labour market.
US stocks are at a Crossroads. If the market can build on its recent gains, it would paint a technical picture which has in the past been associated with 30% average gains. But were it to break down again, it would validate the prior sell signal. Outcomes will hinge on the Fed and the dollar. Renewed Fed dovishness could easily spook international investors who need to continue feeding the US $100bn per month to fund the deficit.
