Making sense of the forces driving global markets |
By Jamie McGeever, Markets Columnist |
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- World stocks hit a fresh record peak, the S&P 500 and Nasdaq both get to within a whisker of their all-time highs.
- Dollar index falls to a 3-year low, the euro and sterling hit highest since 2021, the Swiss franc hits a decade high.
- Soaring FX caps stocks in Europe, where indices lag U.S. peers. In Asia, Japanese, Chinese stocks hit 5-month and 7-month highs, respectively.
- U.S. Treasury yields fall to lowest since early May, also pressured by weak U.S. economic data. Curve bull steepens.
- Platinum rises another 4%, now up 34% this month - its best month in nearly 40 years and second best ever.
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Juice the economy. That seems to be the Trump administration's broad plan, which will be achieved in time by tax cuts, deregulation, and loose fiscal policy. And loose monetary policy. Most definitely loose monetary policy. Pressure from the White House on the Fed to cut interest rates is nothing new. The president has unleashed several verbal tirades towards Chair Jerome Powell for not doing so, branding him "very stupid", "very dumb" and of "low IQ". Powell's term as Chair expires in May next year, and he insists he can't be fired. So Trump is now considering naming his replacement early, who could operate as a 'shadow' Fed chair, undermining Powell's influence. It remains to be seen how effective or even viable this would be. But the fact it's being floated is pouring fuel on market moves that were already beginning to catch fire - the dollar is tumbling, Fed rate cut bets are being ramped up, stocks are flying, and 'Big Tech' is getting its mojo back. |
The dollar on Thursday slumped to its lowest in more than three years against a basket of major currencies - performing especially poorly against European currencies - and is on track for its worst first half of any year in over half a century. The Trump administration will likely be quite happy with the way markets are reacting - a more export-competitive dollar, lower short-term yields, and higher stocks. And if you look further out, higher nominal growth and above-target inflation to inflate away the debt. The danger is these moves snowball and the dollar goes into a more rapid freefall, triggering widespread market dislocation. But we're not there yet, and investors are running with it. |
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Hawkish Fed could inflict markets' biggest 'pain trades' |
As the first half of the year closes, financial markets are in limbo, waiting to see how the kaleidoscope of global trade deals will – or won't – come together after July 9, when Washington's pause on its "reciprocal tariffs" expires. But if investors are wrong-footed, which trades will be the most vulnerable? The state of suspended animation in today's markets is remarkably bullish. U.S. growth forecasts are rising, S&P 500 earnings growth estimates for next year are running at a punchy 14%, corporate deal-making is picking up, and world stocks are at record highs. The uncertainty immediately following President Donald Trump's April 2 "Liberation Day" tariffs seems a distant memory. The relief rally has ripped for nearly three months, only taking a brief pause during the 12-day war between Israel and Iran. It's a pretty rosy outlook, some might say too rosy. If we do see a pullback, what will be the biggest "pain trades"? The major pressure points are, unsurprisingly, in asset classes and markets where positioning and sentiment are most overloaded in one direction. As always with crowded trades, a sudden price reversal can push too many investors to the exit door at once, meaning not all will get out in time. To identify the most overloaded positions, it's useful to look at the Bank of America's monthly global fund manager survey. In the June survey, the top three most-crowded trades right now are long gold (according to 41% of those polled), long "Magnificent Seven" tech stocks (23%), and short U.S. dollar (20%). |
This popularity, of course, means these three trades have been highly profitable. The "Mag 7" basket of Nvidia, Microsoft, Meta, Apple, Amazon, Alphabet and Tesla shares accounted for well over half of the S&P 500's 58% two-year return in 2023 and 2024. The Roundhill equal-weighted "Mag 7" ETF is up 40% this year, and the Nasdaq 100 index, in which these seven stocks' make up more than half of the market cap, this week hit a record high. Meanwhile, the gold price has virtually doubled in the last two-and-a-half years, smashing its way to a record high $3,500 an ounce in April. And the dollar is down 10% this year, on track for its worst first half of any year since the era of free-floating exchange rates was established more than 50 years ago. |
What could move markets tomorrow? |
- Japan retail sales (May)
- Japan unemployment (May)
- Japan Tokyo inflation (June)
- Japan Softbank AGM
- Euro zone sentiment indexes (June)
- U.S. PCE inflation (May)
- U.S. University of Michigan consumer sentiment, inflation expectations (June, final)
- Cleveland Fed President Beth Hammack and Fed Governor Lisa Cook participate in 'Fed Listens' event
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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. |
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