Market Insights August 3, 2026

Japan finally defends its currency

The foreign exchange market has been dominated in recent days by the sharp rebound of the Japanese yen following a large-scale intervention by the Japanese authorities. After falling to a record low of JPY 164 against the U.S. dollar on July 23, the yen rallied by nearly 5% within a few trading sessions, bringing an end to several months of persistent weakness.

According to market estimates, Japan's Ministry of Finance spent between USD 40 and 50 billion to support its currency. It was one of the largest interventions in recent years, with the clear objective of putting a lasting stop to the yen's depreciation. The operation's effectiveness was further enhanced by the joint participation of the U.S. Treasury, sending a strong signal to currency markets.

In our view, this intervention is likely to mark the end of the yen's prolonged downward trend. However, we believe the scope for further appreciation remains limited. Prime Minister Sanae Takaichi's ambitious fiscal stimulus programme, amounting to more than USD 2 trillion through 2040, is expected to increase the government's financing needs and should act as a constraint on a sustained strengthening of the currency. We therefore expect the yen to enter a period of stabilisation rather than the beginning of a lasting bull market.

France: the risk premium on french assets Is likely to remain elevated

After the summer, investors' attention is likely to shift increasingly toward France. The 2027 budget will provide the first major test for a Parliament with no governing majority, at a time when the country's public finances remain under significant pressure. With interest rates expected to remain structurally above nominal GDP growth, stabilising the debt trajectory will be particularly challenging. This is already reflected in the bond market, where the spread between French and German government bond yields remains elevated.

Attention will then turn to the 2027 presidential election, against a backdrop of heightened political uncertainty. The fragmentation of the political centre and the right is likely to be one of the key issues in the first round. More importantly, the outcome of the election will be critical in determining the future direction of France's economic and fiscal policy.

This higher risk premium is also evident in the equity market. Since the surprise dissolution of the French National Assembly in 2024, French equities have underperformed the broader European market by nearly 15%, pushing their relative valuation to its lowest level in almost a decade. While political uncertainty has been a major driver of this underperformance, the French market's significant exposure to the luxury sector has also played an important role. Weaker demand from China has weighed heavily on luxury stocks, causing the sector to significantly underperform the broader European market.

Although part of these risks is now reflected in valuations, we believe the risk premium on French assets is likely to remain elevated over the coming months. We therefore maintain our overweight stance on European equities. However, between France and Germany, we clearly favour the German market. German valuations are also depressed, but the country benefits from a more tangible catalyst: the gradual implementation of its large-scale public investment programme, whose effects should increasingly be reflected in corporate order books over the coming quarters.

This week’s figure: 17.9%

Microsoft's and Amazon's strong results, coupled with their plans to further expand capital expenditures, boosted sentiment toward AI and semiconductors, helping the Korean market post a record daily gain of 17.9% amid the exceptionally high volatility that has recently gripped this stock market.