ORLANDO, Florida, Jan 15 (Reuters) - Solid U.S. bank

earnings and a rebound in tech lifted U.S. stocks on Thursday,

with global risk appetite also fueled by - and oil prices

clobbered by - a more moderate tone from U.S. President Donald

Trump on tensions with Iran.

More of that below. In my column today I look at Japan's

return to economic normality after years of zero interest rates

and deflation. But the brave new world of inflation and rising

bond yields brings uncertainty and volatility.

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. Trump sees Iranian crackdown easing, Tehran

denies man

to be executed

2. Oil traders wrestle with geopolitical trifecta

and

elusive glut: Bousso

3. Exclusive-Trump says he has no plan to fire Fed's

Powell

despite investigation

4. Is that it? The great dollar reversal fizzles:

Mike

Dolan

5. TSMC smashes forecasts with record profit, flags

more

U.S. factories

Today's Key Market Moves

* STOCKS: Fresh peaks for UK FTSE 100, ‌euro STOXX

600,

Japan's Topix, and in Brazil, Mexico and South Korea.

* SECTORS/SHARES: U.S. tech +0.5%, utilities +1%,

financials +0.4%. Energy -0.8%. Chips on a roll - Philadelphia

semiconductor index +2%, now +10% YTD. BlackRock, Morgan Stanley

+6%.

* FX: Dollar index +0.3% to six-week high, up most

vs NOK

as oil slumps. Biggest climbers are EM currencies including MXN,

BRL and ZAR.

* BONDS: 2-year U.S. yield nudges 3.57%, highest in

a

month. Curve bear flattens, rate cut bets shift to July ​from

June.

* COMMODITIES/METALS: Oil slumps 4%, biggest fall

since

June. Gold, silver ease back from record highs.

Today's Talking Points

* Oil on the slide

Oil is on a wild ride, buffeted by geopolitical tensions

in large part sparked by the Trump administration's military

foray into Venezuela, and events ‍in Iran. On Wednesday, Brent

crude was at a three-and-a-half-month high, up almost 10%

year-to-date.

On Thursday, it posted its biggest fall since June after

Trump said the crackdown on protesters in Iran was easing. ⁠If

the threat of U.S.-Iran conflict cools, oversupply returns as

the main market ⁠driver. But as this year has clearly shown,

Trump's foreign policy agenda is, if nothing else,

unpredictable.

* Fed bets fade, curves flatten

Fed rate cut bets are fading. The next fully priced cut is

drifting to July from June, and 50 bps of easing this year is no

longer fully baked into the 2026 curve. Stronger-than-forecast

economic data and sticky inflation ‌are behind the moves.

Among the ripple effects on markets is a flattening of the

yield curve. Most parts of the U.S. curve are now ​at their

flattest in a month, with the 2s/30s curve narrowing 20 bps from

its four-year peak just last week.

* Dollar and the odd yuan out

The U.S. dollar continues to grind higher, as Fed rate

cut expectations whittle away. The greenback on Wednesday hit an

18-month high against the yen, and on Thursday a six-week high

against a basket of major currencies.

The big exception is against China's yuan. The dollar is now

firmly below 7.00 yuan at ⁠its weakest since mid-2023. With China

racking up a record $1.2 trillion trade surplus last year,

Beijing can point to dollar/yuan and reasonably ‍argue it is not

keeping its currency ​artificially weak.

Japan's long-awaited return to normalcy brings

uncertainty, volatility

Japan's economy is returning to something resembling

normality for the first time in decades. That's likely to mean

more volatility ahead for the yen and other Japanese assets, as

investors try to make sense of this new reality.

While Japanese equities are rising to levels never seen

before, that is less remarkable because many other countries'

stock markets are also hitting new all-time peaks. The more

intriguing market moves in Japan are happening in ‍government

bonds (JGBs) and the yen.

Bond yields across the JGB curve are at multi-decade or

record highs, marking a stark disconnect from other major debt

markets like the U.S., where Treasury yields have been fairly

stable in recent months.

The yen, which was the worst-performing major currency

against the dollar last year, has weakened even more to kick off

2026. On Wednesday, it fell to an 18-month low around 160 per

dollar, territory that has previously prompted waves of

yen-buying intervention from the Ministry of Finance.

There appears to be a disconnect here. Central bank interest

rate hikes and rising bond yields should support the currency,

right?

That logic doesn't always hold, however, especially when

Japan's unique debt dynamics and inflation history are taken

into consideration.

WORLD'S MOST CAUTIOUS RATE-HIKING CYCLE

Japan has amassed the world's largest public debt pile of

more than 230% of GDP, thanks to decades of "quantitative

easing" bond-buying, borrowing, fiscal largesse, and near-zero

interest rates to try to pull the economy out of a prolonged

deflationary funk.

It appears to have won that battle. Annual inflation is

running at around 3%, exceeding the Bank of Japan's 2% target

every month for nearly five straight years. And ​wage growth has

been robust in recent ‍years, even if it is now slowing.

The Bank of Japan (BOJ) is finally increasing borrowing

costs, albeit cautiously. It lifted its policy rate last month

to a 30-year high of 0.75% from 0.5%. This is the slowest policy

tightening cycle in modern history, with rates increasing just

85 basis points over two years, but it still is confirmation

that deflation-haunted Japan may no longer be such an outlier.

As independent economics commentator Matthew Klein

observes: "Far from indicating trouble, Japanese bond prices are

implying that ​Japan has converged, in at least one important

way, with the rest of the rich world."

ELEVATED FX VOLATILITY

That may be true, but for many Japanese businesses,

consumers, and investors, the highest interest rates in 30 years

represent a step into the unknown. With this comes uncertainty,

and therefore a likely increase in expected volatility.

This helps explain why the recent rise in JGB yields has

triggered such an adverse reaction in the yen. Investors appear

to fear that historically high borrowing costs could precipitate

a fiscal crisis that will only tighten the squeeze on JGBs and

the yen.

Yen volatility has already been creeping up in the last few

years. Since late 2022, implied three-month dollar/yen

volatility has been consistently and often significantly higher

than comparable measures in euro/dollar and sterling/dollar.

It wasn't always thus. For long spells over the past quarter

century, yen "vol" was in line with, or lower than, its euro and

sterling counterparts.

But times have changed, and there are plenty of reasons to

expect yen "vol" to stay elevated.

Although "real" inflation-adjusted Japanese rates and yields

are still negative, nominal rates are rising, and they could

climb further on the back of Prime Minister Sanae Takaichi's

plans to prime the pumps. The gap with borrowing costs in the

U.S. and other developed markets is narrowing, which ​may spur a

yen rebound, especially if it is backed by intervention from

Tokyo.

Japanese authorities have conducted four bouts of yen-buying

in recent years: twice in 2022 and another two times in 2024.

Traders are on high alert for a fifth.

For the first time in decades, Japan has got inflation, wage

growth, and rising borrowing costs. It's a new "normal" that

will take some getting used to.

What could move markets tomorrow?

* Germany inflation (December, final)

* Bank of England Governor Andrew Bailey speaks

* U.S. industrial production (December)

* U.S. earnings, including PNC Financial, State Street, M&T

Bank

* U.S. Federal Reserve officials scheduled to speak include

Vice

Chair Philip Jefferson, Vice Chair for Supervision Michelle

Bowman, and Boston Fed President Susan Collins

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