Morning Bid: Tariffs return along with capital tax fears

Reuters

a day ago

LONDON, May 30 (Reuters) - What matters in U.S. and global markets today
By Mike Dolan, opens new tab, Editor-At-Large, Financial Industry and Financial Markets
This week's U.S. tariff whiplash has left financial markets dazed, as anxiety about foreign capital taxes and fresh rate cut hopes add to the confusion. June promises to be a tense month in an already turbulent year.
It's Friday, so today I'll provide a quick overview of what's happening in global markets and then offer you some weekend reading suggestions away from the headlines.
Today's Market Minute
* A federal appeals court temporarily reinstated the most sweeping of President Donald Trump's tariffs on Thursday, a day after a U.S. trade court ruled that Trump had exceeded his authority in imposing the duties and ordered an immediate block on them.
* The Trump administration's trade war has cost companies more than $34 billion in lost sales and higher costs, according to a Reuters analysis of corporate disclosures.
* The safety of Germany's gold reserves held overseas and in New York in particular, until recently mainly a talking point for the country's far-right party and gold bugs, is becoming a matter of public debate with Donald Trump back in the White House.
* While we may not see a full-blown debt crisis in the U.S., there's a growing sense that "the fiscal" matters for markets more now than it has for decades. Reuters columnist Jamie McGeever explores the assumptions baked into the current U.S. debt and deficit projections.
* Reuters columnist Gavin Maguire explains why developers and exporters of natural gas should be alarmed by the decline in thermal coal exports coming out of Indonesia.
Tariffs return along with capital tax fears
A federal appeals court temporarily reinstated the most sweeping of Donald Trump's import tariffs late on Thursday.
Allowing the stay while the case progresses, the court ordered the plaintiffs in the cases to respond by June 5 and the administration by June 9. Trump has promised to take the matter all the way to the Supreme Court.
Thursday's rally in stocks (.SPX), opens new tab and the dollar (.DXY), opens new tab faded quickly, with many investors convinced the administration would seek other routes to impose the levies even if it loses its case.
The whole episode raises as many questions as answers, not least regarding when tariffs will be imposed and which ones will eventually come to pass. This heightens business uncertainty as much as it offers any marginal relief.
Countries in bilateral trade talks may be emboldened to avoid making concessions until there is more clarity around the legal issue, meaning we could see a shortening of the already narrow six-week negotiating period left before July 9's re-imposition of "reciprocal tariffs".
Meanwhile, there are also questions over the U.S. fiscal bill now heading through the Senate, including how much delayed or reduced tariffs will impact revenue estimates and deficit calculations.
What's more, investors are increasingly concerned about provisions in the bill - namely Section 899 - that allow the administration to impose taxes of up to 20% on foreign asset holdings. Some fear this could cause the tariff war to morph into a capital war, unnerving overseas investors anew.
Resorting to non-tariff threats would only up the ante in tough trade talks with Europe, which is already countering with threats against U.S. tech firms.
On top of all this, we have next month's annual Treasury review of overseas currency manipulation.
In short, we could soon seen more trade weapons drawn into the fray.
There's even growing angst overseas that foreign holdings of gold at the U.S. central bank could be at risk.
But amid all the speculation, U.S. Treasuries rallied sharply on Thursday.
Some of that was down to signs of weakening economic activity, with weekly jobless claims rising, pending homes sales weakening and first quarter GDP revisions cutting consumer spending estimates and showing a drop in corporate profits.
That was enough to nudge Federal Reserve easing hopes back up, with futures now pricing in two full rate cuts by yearend.
The drop in Treasury yields was helped by a robust auction of 7-year notes, which Morgan Stanley said left primary dealers with just 4.8% of the paper, the lowest primary dealer takedown on record for any Treasury auction.
Amid all this, Trump called Fed Chair Jerome Powell to the White House on Thursday for their first face-to-face meeting since he took office in January. He told the central bank chief he was making a "mistake" by not lowering interest rates.
Underscoring its independence, the Fed issued a statement after the meeting saying it "will set monetary policy, as required by law, to support maximum employment and stable prices and will make those decisions based solely on careful, objective, and non-political analysis."
The April reading for the Fed's favored inflation gauge is due for release on Friday.
Ahead of the open, U.S. stock futures were back slightly in the red, 10-year Treasury yields flirted with their lowest in a fortnight and the dollar (.DXY), opens new tab was firmer after Thursday's sharp reversal.
Elsewhere, European stocks (.STOXXE), opens new tab were higher, but Japan's Nikkei (.N225), opens new tab relapsed more than 1%. Tokyo core inflation readings for May came in higher than forecast at 3.6%, the most in two years, upping speculation that there will be more Bank of Japan interest rate hikes ahead.
European inflation updates for this month were much softer, buoying hopes of further European Central Bank easing as the ECB gets set to meet again next week.
Weekend reading suggestions
Here are some articles away from the day-to-day headlines that you may find interesting.
* GENDER Z: In democracies worldwide, a political gender divide is intensifying among Gen Z voters, with young men voting for right-wing parties and young women leaning left, a break from pre-pandemic years when both tended to vote for progressives. Reuters' Heejung Jung, Mark Bendeich and Thomas Escritt examine this trend.
* RESERVE SWITCH: Just over half of 88 central bank reserve managers said they expected the pace of reserve diversification to accelerate over the next 12 months, according to the annual HSBC Reserve Management Trends survey. Almost 80% of respondents thought de-dollarisation was increasing, though on a gradual basis., opens new tab
* DEFENSE HELP WANTED: While the European Union's 800 billion euro defense spending push is expected to create hundreds of thousands of jobs over the next decade, specially trained AI engineers, data scientists, welders and mechanics are in short supply. Reuters' Michael Kahn, Christoph Steitz, Dominique Patton spoke to more than a dozen companies, recruiters and workers who said that along with hiking wages and benefits, arms makers are poaching from other sectors.
* MGGA: Making Germany Grow Again is the theme of an IMF podcast with Ulrike Malmendier, a professor at University of California, Berkeley and member of the German Council of Economic Advisors. Malmendier explains how ageing Germany needs to attract more skilled migrants, rethink its capital markets and pensions system and address energy supply problems in order to resume its role as Europe's powerhouse economy., opens new tab
* FUZZY FEDSPEAK: Households and professional forecasters often hear Federal Reserve speeches on inflation and monetary policy in different ways, according to a paper on Fed communications published on CEPR's VoxEU site., opens new tab
* EV EVERGRANDE?: An intensifying auto industry price war in China has stoked fears of a long-anticipated shake-out in the world's largest car market. Reuters' Norihiko Shirouzu reveals how steep price cuts may signal a potential tipping point, where weaker players can no longer sustain deepening losses.
* 'SACRIFICE RATIOS' AND PRICE LEVEL: Central bank research show how 'sacrifice ratios' - or output losses per inflation reduction - were historically low during post-pandemic monetary tightening. But it ignores politically toxic price level increases, something that should be included in the list of 'tradeoffs' assessed when conducting policy, according to an NBER paper by economists Kristin Forbes, Jongrim Ha and Ayhan Kose., opens new tab
* DOLLAR SACRIFICE?: Donald Trump's erratic U.S. trade threats against Europe and de-funding of universities are the sorts of policies that come at a price, not least damaging the dollar's cyclical and structural outlook. Writing on Project Syndicate, former Goldman Sachs global economist and UK Treasury minister Jim O'Neill explains why he thinks the implications for the future of American power are profound., opens new tab
* DRONE WARS: Indian and Pakistani militaries have deployed high-end fighter jets, conventional missiles and artillery during decades of clashes, but the four days of fighting in May marked the first time New Delhi and Islamabad utilized unmanned aerial vehicles at scale against each other. Read the fascinating report by Reuters' Devjyot Ghoshal, Ariba Shahid and Shivam Patel.
* INDUSTRIAL POLICY REDUX: Government subsidies, investment incentives, and other industrial-policy actions have almost quadrupled since 2017 - mostly in critical industries such as defense, chips and high-end equipment, according to research from the consulting firm McKinsey., opens new tab
Chart of the day
Companies are struggling to give guidance on the rest of the year's earnings given the high level of uncertainty related to U.S. tariff policy.
Today's events to watch
* U.S. April personal consumption and spending and personal consumption expenditures inflation gauge (8:30 AM EDT), April international goods trade (8:30 AM EDT), April wholesale/retail inventories (8:30 AM EDT), May Chicago business survey (9:45 AM EDT) University of Michigan final May household sentiment survey (10:00 AM EDT); Canada Q1 GDP revision (8:30 AM EDT)
* San Francisco Federal Reserve President Mary Daly, Dallas Fed President Lorie Logan, Atlanta Fed chief Raphael Bostic and Chicago Fed boss Austan Goolsbee all speak.
* U.S. corporate earnings: Marvell Technology
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, opens new tab, is committed to integrity, independence, and freedom from bias.