Daily Newsletter 2/10/26

One thing is clear in today’s markets: uncertainty is likely to persist longer than most investors anticipated. Indexes remain range‑bound, yet the Dow is still trading above 50,000, while the rapid expansion of AI is creating significant challenges for many businesses. Elevated capital expenditure requirements are straining balance sheets, and previously cash‑rich large technology firms are increasingly turning to traditional financing. Japan’s recent elections have further complicated the global market backdrop.

Japan’s recent election, which handed Prime Minister Sanae Takaichi’s Liberal Democratic Party a powerful mandate, is likely to reinforce expectations of prolonged fiscal stimulus and structural reform, with important implications for global carry trades and the Japanese bond market. As investors anticipate continued or expanded government spending and potential tax cuts, upward pressure on Japanese government bond (JGB) yields becomes more likely, even if the Bank of Japan leans against sharp moves through purchases and yield curve control–style tools. A steeper JGB yield curve would narrow the rate differential that has underpinned the yen-funded carry trade, where global investors borrow cheaply in yen to buy higher‑yielding foreign assets; if markets start to price a more meaningful normalization of Japanese rates, some of these positions could unwind, supporting a stronger yen and adding volatility across risk assets. At the same time, if fiscal stimulus boosts growth without a disorderly jump in yields, domestic investors may gradually find local bonds more attractive relative to foreign debt, further reshaping flows that have long supported global fixed-income markets.

Canceling Japan's yen carry trade would likely pressure U.S. financial markets through forced asset sales and a stronger yen.

A yen carry trade unwind would trigger U.S. equity sell-offs, particularly in tech-heavy indexes like the Nasdaq, with S&P 500 drops, echoing the August 2024 episode. Bond markets would face stress from lower Treasury demand as capital flows back to Japan amid rising JGB yields and a shrinking yield spread. Meanwhile, yen strength would raise dollar funding costs, fueling currency swings, risk aversion, and VIX spikes.

However, one key factor remains: the bond vigilantes. Fiscal stimulus must ultimately win their approval as well.

So, how should we interpret these developments? Recent market behavior has been challenging to decipher, with asset prices often reacting sharply to virtually any news—positive or negative—well beyond what we would typically expect. While financial markets naturally respond to new information, the magnitude of these moves stands out. Fundamentally, we do not yet see significant fractures in the U.S. economy, aside from weakening consumer confidence, an alarming rise in credit usage among households, and some emerging signs of stress in the labor market, all of which understandably raise concerns for some investors. That said, we are not overly worried at this stage and believe markets are largely in a holding pattern ahead of the next U.S. CPI release on Friday at 8:30 a.m., which will report January’s inflation data.

In summary, we are maintaining our current positions for now and added a single new position today, which was shared exclusively with paid subscribers.

OUR TRADES

We share all our short-term trades in the Tactical Portfolio exclusively with paid subscribers, showing the exact entry time and price for every trade below. Subscribers receive timely buy and sell alerts via chat. Our approach is eclectic, blending macroeconomic insights with a quantitative methodology. We do not limit ourselves to specific markets or sectors, seeking to profit from any short or very short trade that fits our strategy. We use sophisticated option strategies to capitalize on short-term market movements, ensuring full transparency and prompt exit updates.

Our option positions are presented using a single‑contract example. In practice, our portfolio includes positions with varying contract sizes. This approach allows you to scale position size up or down to reflect the strength of your market view.