Global Markets Strategy 12 September 2025 J P M O R G A N Key Currency Views Patiently bearish on the dollar Figure 1: Different factors are driving G10 FX-external/ fiscal balances, equity and commodities momentum-while EM remains dominated by carry for now Source: J.P. Morgan See page 48 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of in ...

Market Overview - The S&P 500's equity risk premium has reached zero, indicating a potential bubble in the market [1] - Massive investments in data centers are reminiscent of the tech boom, with concerns about sustainability and reliance on a single client, OpenAI [2][3] Investment Strategy - The company is adopting a defensive stance in equity investments, acknowledging the risks associated with current market exuberance [4][3] - There is a cautionary approach towards tech stocks due to potential reversals in the Japanese carry trade, which could impact US tech investments [8][7] Japan's Economic Policy - Japan's current policy rate is approximately 0.5%, with expectations for a 25 basis point increase, which could reverse the carry trade [6][7] - An increase in Japanese interest rates may negatively affect US tech stocks, as Japanese investors may withdraw funds from the US [8] China Market Insights - The company has allocated about 10% of its funds to China, indicating a belief in the potential for growth despite being underweight in the US [10] - Chinese stocks are considered cheap, and the government is showing a willingness to support rising share prices, which is crucial for investment [11][12] Housing Market in China - The Chinese housing market requires a clearing of excess capacity, and while lower interest rates may help, significant government intervention may be necessary [17][19] - The government could potentially buy excess housing for social purposes, which would significantly impact the market [19] Electric Vehicle (EV) Sector in China - The company is currently avoiding investments in the Chinese EV sector due to concerns about excess capacity and market consolidation [20][22] - There is an expectation of consolidation in the automobile market, and the company is looking for potential acquisition targets among struggling firms [21][22]

Market Trends - Hong Kong interest rates are surging, disrupting the previously top-performing carry trade [1] - Local authorities implemented a cash squeeze to alleviate pressure on the city's long-standing currency peg [1]

The carry trade is making a comeback among emerging market investors as bets the Federal Reserve’s will kick off interest-rate cuts next month weaken the dollar and fuel appetite for high-yielding currencies https://t.co/FjI9c6yl4l ...

Summary of Key Points from the Conference Call Industry Overview - The report focuses on the Hong Kong Dollar (HKD) and its exchange rate dynamics against the US Dollar (USD) within the context of the linked exchange rate system (LERS) maintained by the Hong Kong Monetary Authority (HKMA) [3][7]. Core Insights and Arguments 1. **Recent Market Developments**: - In April, the USD/HKD spot approached the lower bound of the peg (7.75) due to a weakening dollar and the announcement of US tariffs. The HKD appreciated sharply in early May, hitting the lower bound multiple times, prompting HKMA intervention to sell HKD and buy USD, which increased interbank liquidity and lowered HKD interest rates [3][7]. - The current USD/HKD spot is trading around 7.8440, influenced by a significant US-HK interest rate differential of approximately 300 basis points for the 3-month LIBOR-HIBOR spread [3][15]. 2. **HKD Peg Mechanism**: - The HKD operates within a tight band of 7.75-7.85 against the USD, with the HKMA intervening to maintain this peg by buying or selling currencies as needed [3][7]. 3. **Liquidity Injection Effects**: - The HKMA's actions have more than tripled the Aggregate Balance to approximately HK$174 billion, leading to a significant drop in short-term interest rates, particularly the 1-month HIBOR, which was fixed at 0.87% on June 3, down from around 4% in late April [3][7][13]. - The 3-month HIBOR also fell below 1.4% in late May, indicating a substantial reduction in borrowing costs, which is expected to support the local economy and property market [3][7][13]. 4. **Market Implications**: - The decline in interest rates is closely monitored by equity investors, particularly in interest-sensitive sectors like banking and property. The report highlights that long USD/HKD forwards are yielding record high annualized carry returns, with short-term FX forwards offering returns above 4% annualized for 1-month forwards [3][8][18]. - If the USD/HKD spot reaches the upper bound (7.85), the HKMA would likely drain liquidity, potentially increasing HIBOR rates. Conversely, a weaker USD or renewed HKD inflows could keep the spot off the upper bound [3][8][18]. Additional Important Content - The HKMA's issuance of Exchange Fund Bills and Notes (EFBNs) is noted as a liquidity management tool, with no immediate plans to drain excess liquidity, which could further support lower interest rates [3][7][8]. - The report emphasizes the importance of monitoring the dynamics of USD/HKD spot movements, as they will significantly influence future interest rate trends in Hong Kong [3][8]. This summary encapsulates the critical aspects of the HKD's current market situation, the implications of HKMA's interventions, and the broader economic context affecting interest rates and investment opportunities in Hong Kong.