The Nasdaq increased by 0.2% because of excitement over Nvidia’s plans to sell AI chips to China, while other stock indices fell. The Russell 2000 small-cap index dropped 1.7%, with only the tech sector of the S&P 500 showing gains. Global bond yields went up, with Japan’s 10-year yield hitting 1.595%, the highest level since 2008. The yields for Japanese 20-year and 30-year bonds reached new highs of 2.65% and 3.20%, respectively, while the U.S. 30-year Treasury yield rose above 5.00%.

Dollar Index Performance

The dollar index rose for the seventh straight session, marking its best streak since October 2023. Although global stocks like the Nasdaq, FTSE 100, and MSCI World Index reached new highs, they later declined due to worries about inflation and rising bond yields. Market sentiment weakened as U.S. inflation data met expectations but raised concerns about potential increases. Despite solid bank earnings, the financial sector did not gain traction. Ongoing worries about fiscal policy, government debt, and inflation remain as rising bond yields affect stock prices. Japan is under extra pressure from political risks ahead of its Upper House election. Despite rising yields, the yen weakened due to concerns about fiscal stability, limits from the Bank of Japan, and fears of stagflation.

Market Divergence And Strategies

The market is showing cracks. While news from one chipmaker keeps the Nasdaq steady, the real situation is changing beneath the surface. The 1.7% drop in the small-cap index isn’t just a fluke; it’s a warning sign. The Nasdaq 100 has surged over 20% this year, while the Russell 2000 remains flat. History shows that such narrow rallies often end poorly. We need to pay attention to the rising bond market. The U.S. 30-year yield moving above 5.00% isn’t just a number; it echoes October 2023, just before the S&P 500 fell sharply. Given this, we see protective put options on broad indices like the SPY as affordable insurance rather than a cost. The Volatility Index (VIX) is around 15, much lower than its average of 20, indicating the market is underestimating risk. Taking long volatility positions through VIX calls is a smart strategy for upcoming challenges. Japan’s situation has shifted from monetary confusion to a serious political and economic crisis. The yen’s inability to strengthen despite rising domestic yields shows a lack of faith in the country’s fiscal stability. Prime Minister Ishiba’s approval rating has dropped to a low 21% in a recent poll ahead of an important election, likely leading to political gridlock. This makes shorting the yen against the dollar an attractive trade. The dollar index’s significant rise, its best streak in nearly a year, adds to this dynamic. We are positioning for USD/JPY to rise toward the 165-170 range, using call options to manage risk, as potential interventions—though unlikely—could cause short-term fluctuations. Create your live VT Markets account and start trading now.

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