Yen Strength and Energy Risks Weigh on Markets as AI Momentum Persists

Japanese exporters are already feeling the pinch from the stronger currency, which erodes their overseas earnings when converted back to yen. The combination of a firmer yen and rising energy costs—driven by geopolitical tensions in the Middle East—has created a challenging environment for Japan's export-oriented economy. Meanwhile, the broader Asian region remains supported by the AI-led tech rally, but the divergence between tech strength and exporter weakness highlights the uneven nature of the current market advance.

On the energy front, Iran's proposal to establish an exclusion zone in the Strait of Hormuz has added to supply concerns. The strait is a critical chokepoint for global oil shipments, and any disruption could have significant implications for energy prices. While current flows through Hormuz are estimated at around 10 million barrels per day, the threat of further restrictions has kept refined-product markets tight. Diplomatic efforts, including talks between Iran and Oman, have offered some hope for a de-escalation, but no operational solution has been reached, and a broader US-Iran deal remains elusive.

Energy is seen as the clearest near-term risk to equities, with elevated oil prices feeding into inflation concerns and potentially forcing central banks to maintain tighter policy for longer. The combination of yen strength, energy supply risks, and ongoing geopolitical tensions in Russia-Ukraine adds to the uncertainty facing global markets. At the same time, copper prices have continued to hit new highs on the London Metal Exchange, reflecting supply constraints, tariff distortions, and still-strong spending in certain sectors—though analysts caution that this is not necessarily a pure signal of broad economic strength.

In a separate development, Chinese soybean crushers are facing high costs and weak margins ahead of President Xi Jinping's visit to the US. The situation highlights the ongoing challenges in agricultural trade and the delicate balance of US-China economic relations. While this issue is distinct from the broader market themes, it adds to the complex backdrop of trade and geopolitical factors influencing investor sentiment.