The problems with doing too much, or too little

Market interventions, sanctions, tariffs and China economic support

The U.S. government has been active this summer. With Japan’s Ministry of Finance, it intervened to support the Japanese yen and doubled its buybacks of long-dated government bonds to help lower yields. Both effects were temporary. The weak Japanese yen and high yields are unlikely to reverse until the underlying causes are addressed.

U.S.-Canada trade talks have broken down, while Washington is pressuring Iran through sanctions on its trading partners. Energy disruptions are sustaining inflation risks and keeping U.S. Federal Reserve (Fed) Chair Kevin Warsh hawkish. In China, weak July retail sales point to the need for more policy support.

These pressures could increase market volatility. Investors are also reassessing U.S. AI revenues as Chinese competition grows and corporate clients use models more efficiently. For investors, this argues for shorter-duration U.S. government bonds and selective high-yield credit. In equities, opportunities extend beyond U.S. technology, while Chinese gains may remain concentrated in artificial intelligence (AI)-related sectors until fiscal support strengthens domestic demand.

Market interventions are like painkillers

In August, the U.S. and Japan bought Japanese yen after it weakened to 163.95 per U.S. dollar. The U.S. Treasury also said that, from September 9, it would double selected buybacks of 10- to 30-year Treasury securities to at least USD 4billion per operation.

The Japanese yen briefly strengthened to 157 per U.S. dollar, while 10- and 30-year Treasury yields fell by 10 basis points (bps). The Japanese yen has since weakened beyond 160, and yields have returned to earlier levels.

Intervention can buy time but cannot solve the underlying problem—much like painkillers that ease symptoms without treating the cause.

The UK’s 2022 mini-budget offers a precedent. Unfunded tax measures drove government bond yields sharply higher. Bank of England (BoE) intervention calmed markets temporarily, but confidence returned only after the government reversed many proposals.

Japan faces a similar constraint. The Bank of Japan (BoJ) must curb inflation without sharply raising borrowing costs, which would add to the government’s debt servicing costs. Expectations of higher rates and expansionary fiscal policy have weakened foreign demand for Japanese government bonds, while domestic institutions continue to favor overseas fixed income. Both trends weigh on the Japanese yen.

In the U.S., long-term yields reflect persistent energy-related inflation, a large fiscal deficit, and heavy technology-company bond issuance that competes with government debt for capital.

Without durable policy solutions to the underlying problems, the impact from intervention will fade, leaving the U.S. dollar and Japanese yen under pressure. Gold could benefit from the “debasement trade” as investors seek assets with limited supply growth.

Trying to gain leverage with sticks

The U.S.-Iran ceasefire expired without an agreement, and the Strait of Hormuz remains largely closed. Brent crude traded at USD 80–93 per barrel, up from USD 72 in early July, reversing earlier declines in fuel prices. This could stall improvement in U.S. inflation and keep the Fed hawkish.

Iran remains firm, while the U.S. is threatening tougher sanctions, including on Iran’s trading partners, to raise the cost of the standoff.

Canada has also left trade talks and retaliated by doubling tariffs on U.S. steel and aluminum to 50% and imposing duties on other goods. These measures could squeeze U.S. corporate margins, especially in autos, and add to inflation.

With U.S. midterm elections two months away, higher living costs and military spending are pressuring the Trump administration. Its latest actions risk further consumer inflation. Fed Chair Kevin Warsh’s Jackson Hole speech highlighted the inflation risk and the central bank’s priority to restore 2% inflation, as the job market continues to be in good shape.

Time for a boost?

China’s domestic demand remains weak. July retail sales rose only 0.6% year-over-year (y/y), below June’s 1.0% and the 1.5% consensus. The housing correction continues to erode household confidence, while unemployment rose to 5.2%, signaling weak job and income growth.

More support is needed. The July Politburo called for faster fiscal deployment, but government bond issuance remains below past levels and the annual quota. Beijing has room to act; timely execution is crucial.

For now, Beijing’s emphasis on AI development and import substitution supports Chinese equities. Stronger fiscal policy could broaden the recovery.

What does this mean for investors?

Iran tensions and renewed tariffs may keep the Fed under pressure to tighten. Bond yields already reflect this risk, despite government buybacks. We continue to favor shorter-duration U.S. government bonds and see value in high-yield corporate debt, supported by a resilient economy.

In equities, strong second-quarter earnings still support the AI investment case despite capital-spending concerns. In the U.S., opportunities extend to financials, consumer discretionary and industrials. In China, fiscal support could lift earnings and broaden gains beyond semiconductors, robotics and other AI themes.

Global economy

• At the Jackson Hole meeting, Fed Chair Kevin Warsh delivered a hawkish message, stressing that inflation remains the Fed’s immediate priority and that recent declines in headline consumer price index (CPI) and personal consumption expenditures (PCE) do not prove underlying price pressures have eased. Markets raised the implied probability of a September 15–16 rate hike, though the Fed may still struggle to secure a majority after only three of 12 voters backed a hike in July.
  (GTMA P. 25, 26)
• Euro area inflation rose to 2.9% y/y in July from 2.8% in June, with services contributing the most to the annual rate, followed by energy. European Central Bank (ECB) policymakers are reportedly prepared to raise rates in September to contain the Iran-conflict-related inflation effects, though appetite for signaling further tightening appears limited and will likely depend on whether elevated energy prices feed into wider inflation dynamics.
  (GTMA P. 17, 18)
• China’s July activity data weakened further and missed expectations, with industrial output up 4.5%, retail sales rising just 0.6% and January–July fixed asset investment contracting 6.7%, including a 19% decline in property investment. Industrial profits slowed versus the first six months, reflecting weak domestic demand, while the National Bureau of Statistics (NBS) cited operating difficulties amid a complex external environment. CPI declined on lower food prices, the producer price index (PPI) slowed on fading energy costs and soft demand, unemployment ticked higher and house prices fell another 3.4% y/y.
  (GTMA P. 5, 6, 7, 9)
• In Japan, nationwide core CPI rose 1.8% y/y in July, in line with expectations and up from 1.6% previously, marking the highest reading since January but remaining below the BoJ’s 2% target for a seventh straight month. Core inflation excluding fresh food and energy also firmed to 1.9%. The data reinforced expectations that the BoJ may move on rates in September, with pressure to act intensifying as energy prices remain elevated and import costs stay high. A BoJ hike appears already discounted and is not expected to materially affect the broader economy, though small and medium-sized firms may face more pressure as higher borrowing costs feed into supplier output prices.
  (GTMA P. 14)

Equities

• Global equities advanced in August, with the MSCI World rising 2.4%, and the S&P 500 and Nasdaq both posting gains. AI remained the dominant performance driver, as S&P 500 second quarter earnings surged and strong results from AI-related companies continued to fuel broad risk appetite. Global equity markets rallied through to mid-August, before a late-month selloff driven by rising bond yields and elevated oil prices tempered gains and left the S&P 500 slightly below its record close.
  (GTMA P. 28, 29, 44, 47)
• Asian equities were mixed and highly volatile in August. The MSCI Asia Pacific ex Japan index posted a strong mid-month gain, with South Korea’s KOSPI surging over 10% in the week through August 14 and Taiwan advancing on renewed AI confidence. Both markets reversed sharply on August 18 as rising Treasury yields and the expiry of the U.S.-Iran ceasefire triggered a risk-off episode, before leading U.S. chipmakers’ blowout earnings lifted tech hardware stocks across the region into month-end.
  (GTMA P. 28, 35, 37)
• Greater China was volatile and mixed in August. Mainland markets swung sharply around AI and semiconductor themes throughout the month. In Hong Kong, insurer shares declined after China imposed 20% tax on offshore insurance income, while select internet names surprised the market with share placement at significant discounts, dragging the Hang Seng Tech Index down 3.6%. Macro sentiment remained cautious overall, with soft domestic demand and policy uncertainty offsetting support from strong exports and AI infrastructure spending.
  (GTMA P. 35, 39)
• Elsewhere, Southeast Asian markets were mixed, with Singapore and Indonesia as notable bright spots. Singapore’s FSTE Straits Times Index hit record highs after the trade ministry raised its 2026 GDP forecast to 4.5%-5.5%, while a stronger-than-expected GDP growth rate and rotation into cheaper markets sparked rebound in the Jakarta Composite Index (JCI).
  (GTMA P. 31, 35)

Fixed income

• The U.S. Treasury (UST) yield curve steepened in the first half of August, as government bond yields rose globally on a confluence of markets demanding higher term premium, expectation for higher real rates, uncertainty in the Middle East conflict, ongoing concerns over fiscal sustainability and the crowding out effect by AI hyperscalers’ issuances. That said, the yield curve has largely twisted flatter since the Treasury’s buyback announcements and Warsh’s hawkish speech at Jackson Hole. 2-year yields end the month 7 bps higher at 4.34%, while 30-year yields nudged 1 bps lower to 5.24%. Overnight Index Swap (OIS) markets currently price in a 65% implied probability for a rate hike at the September FOMC meeting, with a full hike by 2026-end and another by June 2027.
  (GTMA P. 54, 55, 59)
• Credit spreads were flat for investment grade bonds in August, as  increased bond issuance from tech hyperscalers weighed on valuations, despite fundamentals continuing to screen robust for the rest of the credit market. High yields outperformed as supply remains subdued alongside supportive earnings, with spreads tightening by 15 bps. As such, global investment grade and high yield delivered positive performance over the month, up 0.6% and 1%, respectively, in total return terms.
  (GTMA P. 61, 62, 63)

Alternatives

• According to PitchBook data, the number of global private equity deals in 2Q26 is estimated to have increased to 5,672, up from 5,552 in the last quarter. Momentum on deal value stalled, however, with deal activity estimated to amount to USD 420billion in 2Q26, lower than USD 544billion in the last quarter. Exit activity in global private equity also slowed, with USD 275billion across 948 exits estimated in 2Q26, down from USD 343billion across 1,000 exits in the last quarter.
• As for the U.S. middle market, the J.P. Morgan Private Assets Index-Middle Market returned a total 15.9% on a trailing 12-month basis as of July, with revenue growth, net debt change and multiple expansion attributing to 10.3%, -2.2% and 7.5%, respectively.
  (GTMA P. 73, 74)
• Based on the KBRA DLD Direct Lending index on a par-weighted basis, the trailing 12-month default rate excluding non-accruals rose 80 bps over July to 2.2% due to restructurings with one major issuer. As such, the trailing 12-month default rate including non-accruals nudged down to 3.8%. Yield to maturity rose by 13 bps to 9.27% as of July.
  (GTMA P. 75, 76)

Other financial assets

• Oil prices moved sharply higher in August as the U.S.–Iran conflict escalated, with renewed attacks on tankers in the Strait of Hormuz and a Houthi strike on a Saudi Arabian refinery further disrupting supply. Prices pulled back late in the month as Iran resumed talks with Oman on reopening the Strait, leaving execution risk around physical flows and diplomatic durability as the central market focus.
  (GTMA P. 70, 72)
• The USD continued its decline in August with the DXY index closed at 99.4, driven by softer U.S. jobs data, mixed inflation readings and the Treasury’s decision to boost buybacks of longer-dated bonds. By contrast, developed market currencies, such as the EUR and GBP, posted their second consecutive monthly gains, while the JPY retraced to above 160 despite prior intervention efforts. The AUD outperformed due to a combination of surging commodity prices, sticky domestic inflation and hawkish central bank policies.
  (GTMA P. 67, 68, 69)

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