By Michael O’Neill

FX markets have been roiled as equity valuations crack, economic data loses credibility and the Federal Reserve struggles to control the narrative. And that is not irrational or exuberant, it is simply the reality.

Global tech stocks have been aggressively sold in the past week due to a growing sense that the artificial-intelligence boom may be running ahead of itself. For months, investors willingly accepted massive capital-expenditure plans from major tech companies on the assumption that AI-related revenue would scale quickly enough to justify the spending.

Then high-profile business leaders began warning that parts of the market, especially those tied to artificial intelligence, were showing classic bubble characteristics. JPMorgan CEO Jamie Dimon was one of the first. On October 14, he said that a lot of assets look like they are in bubble territory, then on November 5, he suggested that some AI companies were trading at “unsustainable levels” and “in a bubble.”

JPMorgan President Daniel Pinto echoed those comments at the African Business Summit on November 18, saying “that to justify current valuations, a level of productivity is being considered that may not happen as fast as the market is pricing in.”

They aren’t the only major bank executives to issue AI warnings. Goldman Sachs executives stressed that innovation cycles always involve phases of excessive optimism, and that today’s environment resembles past episodes where investors priced in future revenue before it had any realistic chance of materializing.

Their tone reflects less a rejection of AI’s long-term potential and more a reminder that markets do not just move in one direction.

Delayed Data Doldrums

The tech stock meltdown is happening against a backdrop of a fractured Fed and very delayed, incomplete and poor-quality major economic reports trickling down the pipe. The US government shutdown may be over, but it will be a long time before the official government economic reports begin to resemble quality, actionable information. For now, markets are being served up a smorgasbord of incomplete and very stale data that is likely to be subjected to massive revisions in the coming months.

Fed Dysfunction

The Federal Reserve is not speaking with one voice and hasn’t since Stephen Miran took a leave of absence from his role as Trump’s Chair of the Council of Economic Advisors to become a temporary Fed governor. His first action was to vote for a 50 bp rate cut and just two weeks ago he repeated the call for the December meeting. The October 29 monetary policy meeting caused a kerfuffle after Fed Chair Jerome Powell speculated that the 25 bp rate cut may be the last in 2025. That earned him Trump’s disdain, who yesterday called him a “fool” and a “stupid man.” Fed dysfunction, Trump hostility and sticky inflation explain why the odds for a rate cut plunged to 33.8% today from 63% a week ago and 93.7% on October 17.

The release of the FOMC minutes on November 19 confirmed what the policymakers were saying since the end of October.

FX Traders Have No Yen for Yen

The past month and a half has been a roller coaster ride for FX markets due to the constantly shifting global risk sentiment environment. What to do? Buy, sell, hide?

US events played a large role but so did Japan. In Q1 2025, the Japanese yen story was all about monetary-policy normalization as the country began transitioning from decades of ultra-loose policies. The first rate hike in seventeen years on January 24 drove USDJPY down from 158.90 to a low of 139.93, on the assumption that more rate hikes were in the cards.

The yen rally bus lost its wheels due to Trump tariffs and the Fed’s decision to leave rates unchanged until September.

Then the surprise election of Sanae Takaichi, whose victory made her Prime Minister kicked off another leg of USDJPY strength. Ms. Takaichi’s plan is to boost government spending and not intervene in the yen.

FX markets were not impressed and monetary-policy-normalization long yen trades were quickly unravelled.  The US dollar was the main beneficiary and broad-based US dollar safe-haven demand led to weaker G-10 currencies, including the Canadian dollar.

Irrational exuberance? At this point, it’s starting to look more like irrational entertainment.