Making sense of the forces driving global markets |
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The S&P 500 and Nasdaq leaped to new highs on Tuesday thanks to a surge in Nvidia shares, but closed mixed as investors digested a pick-up in U.S. inflation, a raft of major U.S. financial firms' earnings and spiking bond yields around the world, especially in Japan. More on that below, but in my column today I ask whether there is a sense of tariff complacency creeping into markets, as investors increasingly bet on the 'TACO' trade. |
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- The Nasdaq gains 0.2% but other U.S. indices fall, with the Russell 2000 small cap index losing 1.7%. Tech is the only sector on the S&P 500 to rise.
- Nvidia shares rise 4% to a new high above $172, pushing its market cap further above the $4 trillion mark.
- Britain's FTSE 100 rises above 9000 points for the first time ever but ends down 0.6%, its biggest fall since post-Liberation Day turmoil in early April.
- Japanese Government Bond yields hit fresh highs. The 10-year yield is its highest since 2008 at 1.595%, and the 20- and 30-year yields at record peaks of 2.65% and 3.20%, respectively.
- The dollar index rises for a seventh session, its best run since last October.
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Bond blues mar stocks' joy |
It was a mixed bag on world markets on Tuesday. Two of Wall Street's three main indices, Britain's FTSE 100 and the MSCI World index hit fresh peaks, yet U.S. inflation rose, bond yields marched higher and investors gave a thumbs down to seemingly solid earnings from U.S. financial firms. Equity market strength was mostly in tech, after AI darling and chipmaker Nvidia said overnight it plans to resume sales of its H20 AI chips to China. Hong Kong's tech index got the ball rolling with a 2.8% rise, and tech was the only sector on the S&P 500 to close in the green. But if the market's glass was half full at the start of the day, it was half empty by the end of it. U.S. inflation was broadly in line with expectations, yet investors focused on the upside risks; U.S. bank earnings were solid, but financials were among the biggest decliners. The shadow of higher bond yields is beginning to lengthen as worries over governments' fiscal health, tariff-driven inflation and investor appetite for fixed income assets pick up again. The 30-year U.S. Treasury yield is back above 5.00%, but the eye of the bond market hurricane appears to be in Japan. |
Investor angst around an Upper House election on Sunday is bubbling up. Prime Minister Shigeru Ishiba's sliding popularity suggests even his modest goal of retaining a majority is out of reach, and defeat could bring anything from a shift in the makeup of Ishiba's coalition to his resignation. Japanese Government Bond yields are surging, but that's proving to be a headwind for the yen rather than a tailwind as extra pressure on the country's already strained public finances, a straight-jacketed Bank of Japan and stagflation fears more than offset any potential carry for yen investors. The yen slumped to a three-month low on Tuesday, back within sight of the 150 per dollar mark. The raft of economic indicators from China overnight, meanwhile, generally showed activity in June held up better than economists expected, and second quarter GDP growth was slightly stronger than forecasts too. |
But Beijing is still under pressure to inject more stimulus into the economy. The property bubble continues to deflate, with new home prices falling at their fastest pace in eight months, and more broadly, China's economic surprises index is its lowest in three months. If incoming data is beating forecasts, it is because expectations have been lowered so much. |
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Tariff 'doom loop' hangs over global equities |
The astonishing rebound in stocks since early April largely reflects investors' bet that U.S. President Donald Trump won't follow through on his tariff threats. But the market's very resilience may encourage the president to push forward, which could be bad news for equities in both the U.S. and Europe. Investors appear to believe that the April 2 "reciprocal" tariffs were mostly a tactic to bring countries to the negotiating table, and Washington's levies will end up being much lower than advertised. Tariffs may end up much higher than they were before Trump's second term began, but the situation will still be better than the worst-case scenarios initially priced in after Trump's so-called "Liberation Day". |
Monday's equity moves were a case in point. Trump's threat on Saturday to impose 30% levies on imports from the European Union and Mexico - two of America's largest trading partners - was met with a collective market shrug. European and Mexican stocks dipped a bit, but Wall Street closed in the green and the Nasdaq hit a new high. This follows threats in recent days to place a 50% tariff rate on goods imported from Brazil and a 35% levy on goods from Canada not covered under the USMCA agreement. Brazilian stocks have slipped 5%, but Canadian stocks have hit new peaks. |
The question now is whether the line between complacency and the "TACO" trade - the bet that "Trump always chickens out" - is getting blurred. |
What could move markets tomorrow? |
- Japan non-manufacturing tankan survey (July)
- Indonesia interest rate decision
- UK CPI inflation (June)
- U.S. corporate earnings including financial heavyweights Morgan Stanley, Goldman Sachs, and Bank of America
- U.S. PPI inflation (June)
- U.S. industrial production (June)
- U.S. Fed officials scheduled to speak: Governor Michael Barr, Cleveland Fed President Beth Hammack, Richmond Fed President Thomas Barkin, New York Fed President John Williams
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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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