ORLANDO, Florida (Reuters) -TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Well, that time out in the 'everything rally' didn't last long. Wall Street and precious metals hit new highs on Wednesday as investors shrugged off any potential reason to play safe, such as the U.S. government shutdown, and resumed buying.   

More on that below. In my column today I look at the amount of foreign-owned Treasuries held at the Fed, which has just fallen to a 13-year low, and what this might tell us about 'de-dollarization' and overseas demand for U.S. assets.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Fed last month saw rising risks to job market, butremained wary on inflation 2. Markets face 'sharp correction' if mood sours on AI orFed freedom, Bank of England says 3. Europe's ageing burden far less than US or China: MikeDolan 4. Deja vu for Japan markets as Abe-disciple Takaichi'svictory jolts investors 5. Investors set to reignite yield curve steepening iffiscal worries worsenToday's Key Market Moves

* STOCKS: New highs for the S&P 500, Nasdaq, Europe andBritain's FTSE 100, while Asian and world stocks cool. * SHARES/SECTORS: AMD surges 11%, bringing U.S.chipmaker's gains this week to 43%. Philadelphia semiconductorindex +3.4%. Staples, energy, financials, real estate all downaround 0.5%. * FX: Dollar hits 2-month high. Notable decliners includeJapanese yen, New Zealand dollar, South Korean won. * BONDS: Italian 10y trades further through French 10y.U.S. curve bear flattens marginally, 10y auction draws decentdemand but lower than last time. * COMMODITIES/METALS: Record-breaking gold scales$4,000/oz, silver at new high $49.57/oz. Palladium leaps 9%.Today's Talking Points:

* Let it loose!

Policymakers around the world are engaging in a remarkable drive to juice growth, simultaneously revving up both their monetary and fiscal engines to full tilt. What makes it so extraordinary is the economic and financial backdrop it is being done against.

A U.S. capex boom in AI is driving solid growth and earnings expectations, inflation in much of the developed world is above the 2% target, financial conditions are the loosest in years, public debt dynamics are deteriorating, and many markets - stocks, gold and crypto - are at record highs. It's safe to say, the easing push is not without risks.

* Is Japan trailblazing again?

Zooming in on that a bit more, and the focus settles on the easy policy king: Japan. From 'NIRP' and 'ZIRP' to yield curve control, from QE to record public debt, Japan in recent decades has single-mindedly pursued policies often considered unorthodox, unworkable or unrepeatable elsewhere.

Yet where Japan has led, the developed world has usually followed, and the emergence of fiscal dove Sanae Takaichi as the country's next prime minister could be the latest example of this. "Japan is once again trailblazing the path for western markets," says SocGen's Albert Edwards.

* Wait a minute

Minutes of the U.S. Federal Reserve's last policy meeting released show that division among policymakers on the need for further interest rate cuts is perhaps deeper than first thought, or was previously indicated by Chair Jerome Powell.

"Most participants" thought it appropriate to lower rates towards a more neutral level due to labor market risks, but at the same time "a majority of participants" emphasized the upside risks to inflation, which has been running above target for over four years. Maybe two more rate cuts this year aren't a slam dunk?

Fed custody holdings ring 'de-dollarization' alarm

The amount of U.S. Treasuries held at the New York Fed on behalf of global central banks has slumped to its lowest in over a decade, casting renewed doubt on foreign appetite for U.S. sovereign debt and other dollar-denominated assets.

This may seem a little surprising. Recent data, including the Treasury International Capital and International Monetary Fund's 'Cofer' foreign exchange reserves reports, show overseas demand for Treasuries and dollar assets holding up pretty well.

These two data sets are the gold standard measurements for U.S. capital flows and global FX reserves. But they are released with long lags - the last set of TIC data is for the month of July, and the latest Cofer numbers are for the second quarter.

The New York Fed custody holdings figures aren't as comprehensive - central banks can hold their Treasury bonds elsewhere - but they are weekly, which in the world of cross-border, central bank capital flows is virtually 'real time'. 

And right now, these custody holdings are falling. Fast.

The latest figures show that the value of U.S. Treasuries held at the New York Fed on behalf of foreign central banks is $2.78 trillion. That's the lowest since August 2012, and down $130 billion in just two months.

Indeed, it's notable that peak holdings over the last year and a half, of $2.95 trillion, were in March-April this year, coinciding with peak market volatility around U.S. President Donald Trump's 'Liberation Day' tariff chaos. According to this temperature check, foreign central banks seem to have cooled on Treasuries since then. 

Fed custody holdings are only one measure of overseas demand for Treasuries. Could they be a precursor for upcoming TIC and Cofer reports? 

DISSECTING DOLLAR SHARE OF FX RESERVES

The latest TIC data show that foreign central banks bought a net $17.1 billion of U.S. Treasuries in July. That brings net purchases in the first seven months of this year to $38 billion, according to JPMorgan analysts, some $4 billion more than the same period in 2024. 

Meanwhile, the latest Cofer figures show that, adjusting for the dollar's steep depreciation, central banks were actually net buyers of dollar reserves in the April-June period. Analysts at Deutsche Bank estimate central banks' purchases of dollar-denominated securities in the quarter - much of which will have been U.S. Treasury bills and notes - nudged $50 billion. 

These are modest sums when set against the $12 trillion global FX reserves universe and $29 trillion U.S. Treasuries market. But they still point to consistent demand for Treasuries from reserve managers, and pour cold water on the 'de-dollarization' narrative.

That's the notion that the world, alarmed at many of U.S. President Donald Trump's policy agendas and America's deteriorating fiscal health, is reducing its exposure to dollar-denominated assets. The dollar has weakened significantly, but overseas demand for U.S. stocks and bonds remains solid, especially from private sector investors.

"Latest data releases confirm there is no substantial evidence of an abrupt rotation away from U.S. Treasuries after Trump's April tariff announcements," JPMorgan analysts wrote on Friday. 

But as noted, the TIC and Cofer figures are dated. We are now in October, and the Fed's weekly custody holdings suggest there may have been a shift since the summer.

Standard Bank's Steve Barrow says the decline in custody holdings raises a red flag because it has come at a time of notable dollar weakness. Rapid declines in custody holdings more often occur when the dollar surges because central banks are forced to sell some of their Treasuries to raise cash for FX intervention.

"The fact that these custody holdings have fallen so fast might be a sign that central banks have become less enamoured of the Treasury market - and the dollar - in recent months," Barrow wrote on Monday. 

Weekly data can be volatile, and there are much more comprehensive assessments of central banks' appetite for U.S. Treasuries. But could Fed custody holdings be the canary in the 'de-dollarization' coal mine?

What could move markets tomorrow?

* Taiwan trade (September) * Germany trade (August) * Germany industrial production (August) * Bank of England's Catherine Mann speaks * European Central Bank summary of Sept 10-11 policy meeting * European Central Bank board member Philip Lane speaks * Brazil inflation (September) * Mexico inflation (September) * U.S. Treasury auctions $22 billion of 30-year bonds * U.S. Federal Reserve officials scheduled to speak includeMinneapolis Fed's Neel Kashkari, St Louis Fed's Alberto Musalem,and Vice Chair for Supervision Michelle BowmanWant to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. 

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Jamie McGeever;)