ORLANDO, Florida, Oct 8 (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,

but

remained wary on inflation

2. Markets face 'sharp correction' if mood sours on

AI or

Fed freedom, Bank of England says

3. Europe's ageing burden far less than US or China:

Mike

Dolan

4. Deja vu for Japan markets as Abe-disciple

Takaichi's

victory jolts investors

5. Investors set to reignite yield curve steepening

if

fiscal worries worsen

Today's Key Market Moves

* STOCKS: New highs for the S&P 500, Nasdaq, Europe

and

Britain'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 semiconductor

index +3.4%. Staples, energy, financials, real estate all down

around 0.5%.

* FX: Dollar hits 2-month high. Notable decliners

include

Japanese yen, New Zealand dollar, South Korean won.

* BONDS: Italian 10y trades further through French

10y.

U.S. curve bear flattens marginally, 10y auction draws decent

demand 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 include

Minneapolis Fed's Neel Kashkari, St Louis Fed's Alberto Musalem,

and Vice Chair for Supervision Michelle Bowman

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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;)