Key Takeaways
- President Trump has ordered a "substantial reduction" in joint military exercises with South Korea, citing high costs and a desire to maintain a positive relationship with Kim Jong Un.
- The yield on Japan’s 30-year Government Bond (JGB) surged 6 basis points to 4.135%, reaching its highest level in decades amid expectations of a Bank of Japan rate hike.
- RBC Capital Markets downgraded Hermes International (RMS) to "Sector Perform," slashing its price target to €1,700 as luxury sector outperformance begins to narrow.
- Berenberg significantly raised its price target for Rolls-Royce (RR) to 1,900p, up from 1,430p, following the company's robust first-half earnings and raised guidance.
Trump Orders Drastic Cuts to South Korea Drills
In a move that has rattled the heart of the U.S.-South Korea alliance, President Donald Trump has instructed the Pentagon to "substantially reduce" joint military exercises. Trump announced the decision via social media, labeling the drills as "costly" and "hostile" toward North Korea. The directive comes despite the ongoing Ulchi Freedom Shield (UFS) exercises, which began this week with approximately 13,500 South Korean and 5,000 U.S. troops.
The decision has sparked immediate concern in Seoul regarding defense readiness and the future of the security pact. Analysts suggest the move may be a bid to re-engage North Korean leader Kim Jong Un, though South Korean officials were reportedly "baffled" by the sudden announcement. Trump also linked the reduction to Seoul's refusal to participate in U.S.-led efforts regarding the denuclearization of Iran.
Japan’s 30-Year Yield Hits New Highs
The Japanese bond market experienced significant selling pressure on Tuesday, sending the yield on the 30-year JGB up 6 basis points to 4.135%. This surge follows a broader trend where the 10-year yield hit a 30-year high of 2.93% earlier in the week. Investors are increasingly pricing in a potential interest rate hike from the Bank of Japan (BOJ) as early as September to combat a weakening yen and rising inflation.
The rise in long-term yields is making domestic bonds more attractive to Japanese institutional investors, potentially leading to a repatriation of capital from overseas markets. This shift has already begun to impact U.S. Treasuries, as Japan remains the largest foreign holder of American government debt.
Analyst Actions: Hermes Downgraded, Rolls-Royce Lifted
In the equity markets, RBC Capital Markets has cooled its outlook on the luxury sector, downgrading Hermes International (RMS) from "Outperform" to "Sector Perform." The bank lowered its price target to €1,700 from €1,900, noting that the company’s ability to significantly outgrow its peers is diminishing. While demand for iconic leather goods remains high, broader sector headwinds and high valuation multiples are limiting further upside.
Conversely, Rolls-Royce (RR) received a major endorsement from Berenberg, which hiked its price target to 1,900p from 1,430p. The upgrade follows a stellar first-half performance where the company reported a 46% rise in underlying operating profit to £2.5 billion. Analysts highlighted the company's "best-in-class" engine fleet and growing exposure to the high-margin data center market through its Power Systems division as primary catalysts for the revised target.
Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications.