Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions Saved Articles My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials HomeInvestorThe stock market bull case just got strongerMartin Pelletier: Two policy decisions may have ended the liquidity squeeze that had weighed on equities, bonds and precious metalsLast updated 13 minutes ago You can save this article by registering for free here. Or sign-in if you have an account.The Wall Street Bull in the Financial District, home to the New York Stock Exchange, in Manhattan, New York City. Photo by Spencer Platt/Getty Images filesLast week may prove to be a key turning point for financial markets, reversing what many feared was the beginning of a broader correction.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountorFor months, investors have been contending with two powerful forces: a relentlessly strong U.S. dollar and steadily rising real interest rates. Both have drained liquidity from the financial system, pressured asset valuations, and created challenges for everything from growth stocks to precious metals. Add in the volatility in oil prices and persistently higher crack spreads (the price difference between a barrel of crude oil and the products refined from it) following the closure of the Strait of Hormuz, and the pressure was amplified even further. This is important because as most commodities are priced in U.S. dollars, a stronger greenback and higher energy prices together act like a global tightening mechanism.The first positive shift came when new Federal Reserve chair Kevin Warsh chose to hold rates steady at a time when many investors were bracing for another hike. That mattered because markets were already adjusting to a much higher cost of capital thanks to bond yields getting pushed to levels not seen since 2008. The more consequential development came days later when Treasury Secretary Scott Bessent joined Japan in supporting the yen after the currency had weakened sharply against the U.S. dollar.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againJapan is one of the largest foreign holders of U.S. government debt, with Treasury holdings estimated around US$1.1 trillion to US$1.4 trillion, depending on the reporting measure. Traditionally, when Japan wants to support the yen, it sells dollar assets, including U.S. Treasuries, and uses the proceeds to buy yen. The concern is that when the yen weakens, Japan intervenes, Treasuries are sold, Treasury supply rises and U.S. yields move even higher. That is exactly why the market pays such close attention to Japanese intervention.This is where last week’s intervention became so important. The U.S. Treasury participated in a co-ordinated yen-buying operation alongside Japan, with the Financial Times reporting that the New York Fed sold euros for yen on behalf of the Treasury in order to pay for it.The even bigger development was the discussion around the Federal Reserve’s Foreign and International Monetary Authorities repo facility. This facility allows foreign central banks to pledge U.S. Treasuries as collateral and borrow dollars without selling those Treasuries outright. Japan can then use those dollars to intervene in currency markets while avoiding forced liquidation of its Treasury portfolio. To simplify, this takes the old model of: Japan needs dollars, Japan sells Treasuries and the Treasury market absorbs the supply — and transforms it into: Japan pledges Treasuries, borrows dollars and avoids dumping bonds into the market. From Washington’s perspective, that is highly attractive because it reduces the risk of forced Treasury selling and upward pressure on U.S. borrowing costs.Some, such as the Wall Street Journal’s James Mackintosh have described this as “money printing,” but that is too simplistic. It is true that a repo transaction temporarily expands the Fed’s balance sheet. But this is not quantitative easing in the traditional sense. The Fed is not buying Treasuries outright, monetizing government debt or permanently injecting reserves into the system. It is making a collateralized loan against existing Treasury holdings. When the loan is repaid, the dollars disappear and the collateral is returned.Markets, particularly risk assets such as equities, quickly recognized the significance. The combination of Warsh’s decision to hold rates steady and Bessent’s support for the yen signalled that policymakers understood financial conditions had tightened materially. A stronger U.S. dollar, higher real yields and rising oil prices were already doing much of the heavy lifting.The timing is especially important for equities. The artificial intelligence buildout continues to require enormous investment in data centres, semiconductors, power infrastructure and networks. Many of the companies leading this race are spending cash almost as quickly as they generate it. Alphabet’s recent move into negative free cash flow highlights just how capital intensive this cycle has become. A more supportive liquidity backdrop makes funding these investments considerably easier.The benefits also extend beyond equities. Gold, silver and long dated government bonds have all struggled the past six months. If those pressures continue to moderate, the outlook for these assets improves considerably and the swift bounceback seen last week can turn into a stronger directional upward trend.Finally, the important lesson in all of this is that Treasury and Federal Reserve policy can influence markets as much as, if not more than, earnings reports or economic data. Last week’s message was a reminder that when financial conditions become excessively restrictive or market functioning comes under pressure, policymakers are willing to act. That reduces tail risk, supports liquidity and creates a more constructive backdrop for equities, precious metals and other duration-sensitive assets.Martin Pelletier, CFA, is the author of Investing Through the Storm and a senior portfolio manager at TriVest Wealth, a team that is part of Wellington-Altus Private Counsel Inc. TriVest provides discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus._____________________________________________________________If you like this story, sign up for the FP Investor Newsletter. Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.