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Trading Day-London calling, stocks crawling higher
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist I'm excited to announce that I'm now part of Reuters Open Interest (ROI), an essential new source for data-driven, expert commentary on market and economic trends. You can find ROI on the Reuters website, and you can follow us on LinkedIn and X. Trade tensions, policy uncertainty and shaky economic data continue to cloud the near-term outlook for world growth, but they remain on the back burner for now as investors kick off the week by pushing global stock markets higher. In my column today I look at why the dollar has depreciated significantly this year regardless of how U.S. stocks and bonds have performed. The main reason? Hedging. More on that below, but first, a roundup of the main market moves. If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Defying debt warnings, Republicans push forward on Trumptax agenda 2. 'Blue' euro bonds to rival Treasuries?: Mike Dolan 3. Japan to consider buying back some super-long governmentbonds, sources say 4. Wall Street, Main Street push for foreign tax rethink inU.S. budget bill 5. Auto companies 'in full panic' over rare-earthsbottleneck Today's Key Market Moves * World stocks set a new record high. The MSCI World indexrises 0.3% to 895.60 points. * Wall Street closes in the green despite a flurry of lateselling, and the S&P 500 nudges further above 6000 points. TheRussell 2000 small caps index rises most, up 0.6%. * The dollar index slips 0.25%. But the biggest declinerin global FX on Monday is the Colombian peso, down 0.7% afterthe assassination attempt on Senator Miguel Uribe, a potentialpresidential contender. * The U.S. yield curve bull steepens, snapping four sessionsof flattening, with the 2- and 3-year yields down 4 bps. Nextup, a $58 billion auction of 3-year notes on Tuesday. * Oil rises for a third day, with Brent crude climbing 1%above $67/bbl, its highest level since late April. London calling, stocks crawling higher It was a fairly quiet start to the week across global markets on Monday, with strong equity gains in Asia followed by a grind higher on Wall Street which lifted the MSCI World index to a fresh record high. The main areas of focus for investors were China's economic 'data dump' for May, then the high-level U.S.-China trade talks in London. The two are connected - the U.S. is a less important market for China than it used to be, underscored in May's trade figures from Beijing and reflected in the lack of concrete progress from the negotiations in London. China's total exports rose 4.8% in May from a year earlier but this masks a huge split between the U.S. and the rest of the world. Exports to the U.S. plunged 34.4% year-on-year in value terms, the sharpest drop since February 2020 just before the pandemic, while exports to the rest of the world rose 11.4%. Monthly data are volatile, of course, and May's figures were also distorted by tariffs. Still, U.S.-bound shipments worth $28.8 billion last month were just 9% of the total $316 billion. Economist Phil Suttle notes that is less than half the average share in the decade leading up to President Donald Trump's first trade war. The London talks are expected to continue on Tuesday. But as was the case following Trump's telephone call with Chinese leader Xi Jinping on Thursday, there is little indication of a significant breakthrough, far less China bending to U.S. demands. "U.S. Treasury Secretaries who live in unbalanced economies might not want to throw barbs such as the 'most unbalanced in modern history' at China without first looking at some data," Suttle wrote on Monday. "The choice to fight an opponent should be conditioned on a clear-headed view of its strengths and weaknesses. The U.S. has done a marvelous job of (once again) deluding itself on this front," Suttle added. Still, divisions between the two countries and the threat to global supply chains are proving no barrier to rising stock markets. Japan's Nikkei and the MSCI emerging and Asia ex-Japan indexes rose around 1%, Hong Kong-listed tech stocks rose nearly 3%, and Wall Street closed in the green. Meanwhile, the dollar's trend this year of declining despite U.S. stocks and bonds rising was on full display on Monday. Wall Street closed slightly higher and Treasury yields fell as much as 5 basis points at the short end of the curve, yet the dollar slipped. Many analysts say one of the main reasons for this is non-U.S. investor hedging - more on that below. Dollar floored as investors seek that extra hedge All three major U.S. asset classes – stocks, bonds and the currency – have had a turbulent 2025 thus far, but only one has failed to weather the storm: the dollar. Hedging may be a major reason why. Wall Street's three main indices and the ICE BofA U.S. Treasury index are all slightly higher for the year to date, despite the post-'Liberation Day' volatility, while the dollar has steadily ground lower, losing around 10% of its value against a basket of major currencies and breaking long-standing correlations along the way. The dollar was perhaps primed for a fall. It's easy to forget, but only a few months ago the 'U.S. exceptionalism' narrative was alive and well, and the dollar scaling heights rarely seen in the past two decades. But that narrative has evaporated, as U.S. President Donald Trump's controversial economic policies and isolationist posture on the global stage have made investors reconsider their exposure to U.S. assets. But why is the dollar feeling the burn more than stocks or bonds? PENSION FUND-AMENTALS Non-U.S. investors often protect themselves against sharp currency fluctuations via the forward, futures or options markets. The difference now is that the risk premium being built into U.S. assets is pushing them – especially equity holders – to hedge their dollar exposure more than they have in the past. Foreign investors have long hedged their bond exposure, with dollar hedge ratios traditionally around 70% to 100%, according to Morgan Stanley, as currency moves can easily wipe out modest bond returns. But non-U.S. equity investors have been much more loath to pay for protection, with dollar hedge ratios averaging between 10% and 30%. This is partly because the dollar was traditionally seen as a 'natural' hedge against stock market exposure, as it would typically rise in 'risk off' periods when stocks fell. The dollar would also normally appreciate when the U.S. economy and markets were thriving – the so-called 'Dollar Smile' – giving an additional boost to U.S. equity returns in good times. A good barometer of global 'real money' investors' view on the dollar is how willing foreign pension and insurance funds are to hedge their dollar-denominated assets. Recent data on Danish funds' currency hedging is revealing. Danish funds' U.S. asset hedge ratio surged to around 75% from around 65% between February and April. According to Deutsche Bank analysts, that 10 percentage point rise is the largest two-month increase in over a decade. Anecdotal evidence suggests similar shifts are taking place across Scandinavia, the euro zone and Canada, regions where dollar exposure is also high. The $266 billion Ontario Teachers' Pension Plan reported a $6.9 billion foreign currency gain last year, mainly due to the stronger dollar. Unless the fund has increased its hedging ratio this year, it will be sitting on huge foreign currency losses. "Investors had embraced U.S. exceptionalism and were overweight U.S. assets. But now, investors are increasing their hedging," says Sophia Drossos, economist and strategist at the hedge fund Point72. And there is a lot of dollar exposure to hedge. At the end of March foreign investors held $33 trillion of U.S. securities, with $18.4 trillion in equities and $14.6 trillion in debt instruments. RIDING OUT THE STORM The dollar's malaise has upended its traditional relationships with stocks and bonds. Its generally negative correlation with stocks has reversed, as has the usually positive correlation with bonds. The divergence with Treasuries has gained more attention, with the dollar diving as yields have risen. But as Deutsche Bank's George Saravelos notes, the correlation breakdown with stocks is "very unusual". When Wall Street has fallen this year the dollar has fallen too, but at a much faster pace. And when Wall Street has risen the dollar has also bounced, but only slightly. This has led to the strongest positive correlation between the dollar and S&P 500 in years, though that's a bit deceptive, as the dollar is sharply down on the year while stocks are mildly stronger. Of course, what we could be seeing is simply a rebalancing. Saravelos estimates that global fixed income and equity managers' dollar exposure was at near record-high levels in the run-up to the recent trade war. This was a "cyclical" phenomenon over the last couple of years rather than a deep-rooted structural one based on fundamentals, meaning it could be reversed relatively quickly. But, regardless, the dollar's hedging headwind seems likely to persist. "Given the size of foreign holdings of both stocks and bonds, even a modest uptick in hedge ratios could prove a considerable FX flow," Morgan Stanley's FX strategy team wrote last month. "As long as uncertainty and volatility persist, we think that hedge ratios are likely to rise as investors ride out the storm." What could move markets tomorrow? * South Korea current account (April) * UK BRC retail sales (May) * UK employment (April) * Brazil inflation (May) * U.S. 3-year Treasury note auction 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. (By Jamie McGeever; Editing by Nia Williams) Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
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Trading Day-London calling, stocks crawling higher
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist I'm excited to announce that I'm now part of Reuters Open Interest (ROI), an essential new source for data-driven, expert commentary on market and economic trends. You can find ROI on the Reuters website, and you can follow us on LinkedIn and X. Trade tensions, policy uncertainty and shaky economic data continue to cloud the near-term outlook for world growth, but they remain on the back burner for now as investors kick off the week by pushing global stock markets higher. In my column today I look at why the dollar has depreciated significantly this year regardless of how U.S. stocks and bonds have performed. The main reason? Hedging. More on that below, but first, a roundup of the main market moves. If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Defying debt warnings, Republicans push forward on Trumptax agenda 2. 'Blue' euro bonds to rival Treasuries?: Mike Dolan 3. Japan to consider buying back some super-long governmentbonds, sources say 4. Wall Street, Main Street push for foreign tax rethink inU.S. budget bill 5. Auto companies 'in full panic' over rare-earthsbottleneck Today's Key Market Moves * World stocks set a new record high. The MSCI World indexrises 0.3% to 895.60 points. * Wall Street closes in the green despite a flurry of lateselling, and the S&P 500 nudges further above 6000 points. TheRussell 2000 small caps index rises most, up 0.6%. * The dollar index slips 0.25%. But the biggest declinerin global FX on Monday is the Colombian peso, down 0.7% afterthe assassination attempt on Senator Miguel Uribe, a potentialpresidential contender. * The U.S. yield curve bull steepens, snapping four sessionsof flattening, with the 2- and 3-year yields down 4 bps. Nextup, a $58 billion auction of 3-year notes on Tuesday. * Oil rises for a third day, with Brent crude climbing 1%above $67/bbl, its highest level since late April. London calling, stocks crawling higher It was a fairly quiet start to the week across global markets on Monday, with strong equity gains in Asia followed by a grind higher on Wall Street which lifted the MSCI World index to a fresh record high. The main areas of focus for investors were China's economic 'data dump' for May, then the high-level U.S.-China trade talks in London. The two are connected - the U.S. is a less important market for China than it used to be, underscored in May's trade figures from Beijing and reflected in the lack of concrete progress from the negotiations in London. China's total exports rose 4.8% in May from a year earlier but this masks a huge split between the U.S. and the rest of the world. Exports to the U.S. plunged 34.4% year-on-year in value terms, the sharpest drop since February 2020 just before the pandemic, while exports to the rest of the world rose 11.4%. Monthly data are volatile, of course, and May's figures were also distorted by tariffs. Still, U.S.-bound shipments worth $28.8 billion last month were just 9% of the total $316 billion. Economist Phil Suttle notes that is less than half the average share in the decade leading up to President Donald Trump's first trade war. The London talks are expected to continue on Tuesday. But as was the case following Trump's telephone call with Chinese leader Xi Jinping on Thursday, there is little indication of a significant breakthrough, far less China bending to U.S. demands. "U.S. Treasury Secretaries who live in unbalanced economies might not want to throw barbs such as the 'most unbalanced in modern history' at China without first looking at some data," Suttle wrote on Monday. "The choice to fight an opponent should be conditioned on a clear-headed view of its strengths and weaknesses. The U.S. has done a marvelous job of (once again) deluding itself on this front," Suttle added. Still, divisions between the two countries and the threat to global supply chains are proving no barrier to rising stock markets. Japan's Nikkei and the MSCI emerging and Asia ex-Japan indexes rose around 1%, Hong Kong-listed tech stocks rose nearly 3%, and Wall Street closed in the green. Meanwhile, the dollar's trend this year of declining despite U.S. stocks and bonds rising was on full display on Monday. Wall Street closed slightly higher and Treasury yields fell as much as 5 basis points at the short end of the curve, yet the dollar slipped. Many analysts say one of the main reasons for this is non-U.S. investor hedging - more on that below. Dollar floored as investors seek that extra hedge All three major U.S. asset classes – stocks, bonds and the currency – have had a turbulent 2025 thus far, but only one has failed to weather the storm: the dollar. Hedging may be a major reason why. Wall Street's three main indices and the ICE BofA U.S. Treasury index are all slightly higher for the year to date, despite the post-'Liberation Day' volatility, while the dollar has steadily ground lower, losing around 10% of its value against a basket of major currencies and breaking long-standing correlations along the way. The dollar was perhaps primed for a fall. It's easy to forget, but only a few months ago the 'U.S. exceptionalism' narrative was alive and well, and the dollar scaling heights rarely seen in the past two decades. But that narrative has evaporated, as U.S. President Donald Trump's controversial economic policies and isolationist posture on the global stage have made investors reconsider their exposure to U.S. assets. But why is the dollar feeling the burn more than stocks or bonds? PENSION FUND-AMENTALS Non-U.S. investors often protect themselves against sharp currency fluctuations via the forward, futures or options markets. The difference now is that the risk premium being built into U.S. assets is pushing them – especially equity holders – to hedge their dollar exposure more than they have in the past. Foreign investors have long hedged their bond exposure, with dollar hedge ratios traditionally around 70% to 100%, according to Morgan Stanley, as currency moves can easily wipe out modest bond returns. But non-U.S. equity investors have been much more loath to pay for protection, with dollar hedge ratios averaging between 10% and 30%. This is partly because the dollar was traditionally seen as a 'natural' hedge against stock market exposure, as it would typically rise in 'risk off' periods when stocks fell. The dollar would also normally appreciate when the U.S. economy and markets were thriving – the so-called 'Dollar Smile' – giving an additional boost to U.S. equity returns in good times. A good barometer of global 'real money' investors' view on the dollar is how willing foreign pension and insurance funds are to hedge their dollar-denominated assets. Recent data on Danish funds' currency hedging is revealing. Danish funds' U.S. asset hedge ratio surged to around 75% from around 65% between February and April. According to Deutsche Bank analysts, that 10 percentage point rise is the largest two-month increase in over a decade. Anecdotal evidence suggests similar shifts are taking place across Scandinavia, the euro zone and Canada, regions where dollar exposure is also high. The $266 billion Ontario Teachers' Pension Plan reported a $6.9 billion foreign currency gain last year, mainly due to the stronger dollar. Unless the fund has increased its hedging ratio this year, it will be sitting on huge foreign currency losses. "Investors had embraced U.S. exceptionalism and were overweight U.S. assets. But now, investors are increasing their hedging," says Sophia Drossos, economist and strategist at the hedge fund Point72. And there is a lot of dollar exposure to hedge. At the end of March foreign investors held $33 trillion of U.S. securities, with $18.4 trillion in equities and $14.6 trillion in debt instruments. RIDING OUT THE STORM The dollar's malaise has upended its traditional relationships with stocks and bonds. Its generally negative correlation with stocks has reversed, as has the usually positive correlation with bonds. The divergence with Treasuries has gained more attention, with the dollar diving as yields have risen. But as Deutsche Bank's George Saravelos notes, the correlation breakdown with stocks is "very unusual". When Wall Street has fallen this year the dollar has fallen too, but at a much faster pace. And when Wall Street has risen the dollar has also bounced, but only slightly. This has led to the strongest positive correlation between the dollar and S&P 500 in years, though that's a bit deceptive, as the dollar is sharply down on the year while stocks are mildly stronger. Of course, what we could be seeing is simply a rebalancing. Saravelos estimates that global fixed income and equity managers' dollar exposure was at near record-high levels in the run-up to the recent trade war. This was a "cyclical" phenomenon over the last couple of years rather than a deep-rooted structural one based on fundamentals, meaning it could be reversed relatively quickly. But, regardless, the dollar's hedging headwind seems likely to persist. "Given the size of foreign holdings of both stocks and bonds, even a modest uptick in hedge ratios could prove a considerable FX flow," Morgan Stanley's FX strategy team wrote last month. "As long as uncertainty and volatility persist, we think that hedge ratios are likely to rise as investors ride out the storm." What could move markets tomorrow? * South Korea current account (April) * UK BRC retail sales (May) * UK employment (April) * Brazil inflation (May) * U.S. 3-year Treasury note auction 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. (By Jamie McGeever; Editing by Nia Williams)
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5 days ago
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Morning Bid: ECB to cut, Fed hopes up
By Mike Dolan LONDON (Reuters) - What matters in U.S. and global markets today It was the bond market's turn to rally over the past 24 hours, with a stream of soft U.S. economic readings lifting hopes for Federal Reserve easing just as the European Central Bank is teed up for another rate cut on Thursday. I'll discuss this and all of the market news below, and then in today's column, I explore Switzerland's deflation dilemma and explain why all investors should care what happens with the Swiss franc. Today's Market Minute * U.S. President Donald Trump signed a proclamation on Wednesday banning the citizens of 12 countries from entering the United States, saying the move was needed to protect against "foreign terrorists" and other security threats. * Hardline conservative Republicans in the U.S. Senate and billionaire Elon Musk showed no sign of softening opposition to President Donald Trump's tax-cut and spending bill on Wednesday, as they pushed for deeper reductions in government outlays. * The euro steadied near six-week highs against the dollar ahead of an expected interest rate cut from the European Central Bank on Thursday, while the U.S. currency recovered modestly from a dip after data renewed fears of slow growth and high inflation. * Investors, consumers and policymakers may justifiably fear the specter of tariff-fueled inflation later this year and beyond, but Reuters columnist Jamie McGeever says it's powerful global disinflationary forces that are weighing most heavily right now. * The Trump administration's latest efforts to curb U.S. petrochemical exports to China could end up hurting the U.S. energy sector just as much, or more, than the Chinese economy, argues Reuters columnist Ron Bousso. ECB to cut, Fed hopes up The ECB is widely expected to cut its main interest rate to 2% later today, effectively bringing inflation-adjusted rates back to zero for the first time in almost two years as May headline inflation has already returned to target. The big question now is whether the ECB will signal that it will pause during the summer while the murky global trade picture clears up - much as the Bank of Canada did on Wednesday. Aside from questions about ECB boss Christine Lagarde seeing out her full term as president, the focus of the press conference will likely be on possible ECB plans for coping with potentially outsize euro strength ahead. There will also be close attention paid to the ECB's signalling regarding its balance sheet runoff. European stocks pushed higher on Thursday. The euro held above $1.14 ahead of the ECB decision, after the dollar skidded lower again Wednesday. The move in the greenback was largely driven by a series of weak readings on U.S. private sector jobs and service sector activity for May. Wall Street stocks ended Wednesday's session unchanged, and futures stalled ahead of today's open. The latest economic news also dragged 10-year Treasury yields back down to their lowest levels in a month. The futures market is now pricing in some 56 basis points of Fed easing for the rest of the year, with a quarter point cut by September almost fully baked in. President Donald Trump lost little time before pressuring Fed boss Jerome Powell to lower borrowing costs. "ADP number out. 'Too Late' Powell must now lower the rate. He is unbelievable. Europe has lowered nine times," Trump said in a Truth Social post, referring to Wednesday's jobs data and - mistakenly - the seven ECB cuts so far in the current cycle. The tariff picture remained unclear, meanwhile. There is still no specific date or time set for this week's hotly anticipated call between Trump and China's President Xi Jinping, but Paris talks between U.S. Trade Representative Jamieson Greer and European Union counterpart Maros Sefcovic appeared to go well despite the doubling of steel tariffs this week. Trump's deadline for countries to present their improved trade negotiations passed without any concrete developments. Germany's new chancellor Friedrich Merz will hold his first face-to-face talks with Trump on Thursday in a high-stakes meeting in the Oval Office. Meanwhile, the fate of Trump's 'big, beautiful' fiscal bill in the Senate also remained in the balance. Hardline conservative Republicans and billionaire Elon Musk stepped up opposition to the tax cut and spending bill on Wednesday, pushing for deeper cuts, with Musk bemoaning "the fast lane to debt slavery." The nonpartisan Congressional Budget Office estimated the bill - which would extend Trump's 2017 tax cuts and step up spending for the military and border security - will add about $2.4 trillion to the country's $36.2 trillion debt pile. Elsewhere, MSCI's all-country stock index hovered just below Wednesday's new all-time high, with stocks in China and Europe advancing and South Korea's Kospi index adding another 1% on top of Wednesday's 2% gains after the presidential election there this week. Japan's Nikkei bucked the trend after another poor government bond auction there, despite reports yesterday that the Bank of Japan may consider slowing its balance sheet rundown. And now for today's deep dive, I discuss Switzerland's return to deflation due to the supercharged Swiss franc and consider the wider implications for global investors. Chart of the day U.S. economic activity has declined and higher tariff rates have put upward pressure on costs and prices in the weeks since Federal Reserve policymakers last met to set interest rates, the Fed's latest "Beige Book" said on Wednesday. "On balance, the outlook remains slightly pessimistic and uncertain", concluded the report. "There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward." Today's events to watch * European Central Bank policy decision (8:15 AM EDT), economic projections and press conference from President Christine Lagarde * U.S. April international trade balance (8:30 AM EDT), weekly jobless claims (8:30 AM EDT), Q1 revisions on unit labor costs and productivity (1:30 PM EDT); Canada April trade balance (8:30 AM EDT) * Federal Reserve Board Governor Adriana Kugler, Kansas City Fed President Jeffrey Schmid, Philadelphia Fed chief Patrick Harker all speak. Bank of England policymaker Megan Greene speaks * German Chancellor Friedrich Merz meets U.S. President Donald Trump in Washington * U.S. corporate earnings: Broadcom, Lululemon, Brown-Forman 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. (By Mike Dolan; Editing by Anna Szymanski)
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6 days ago
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Trading Day: Market inflection points abound
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Stocks and the dollar rose solidly on Tuesday even though markets lacked a central, driving force - signs of weakening economic activity, cooling labor markets and disinflation are all reasons for caution, but risk appetite continues to be fueled by hopes that U.S.-China trade tensions will soon ease. In my column today I look at why foreign investors' exposure to U.S. assetsmay not be as high as feared. If it's not, the potential downside for Wall Street and Treasuries from diversification may be less severe. More on that below, but first, a roundup of the main market moves. If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Markets anxious as 'new cold war' turns hot: Mike Dolan 2. FX options market positioned for further dollar weakness 3. OECD lowers global outlook as Trump trade war hits 4. Japan to promote domestic ownership of JGBs, policydraft shows 5. G7 debt is now a pressure point for anxious markets Today's Key Market Moves * The S&P 500 hits a three-month high, rising 0.6% on theday, and the Nasdaq hits its highest level since February aftera 0.7% rise. * The dollar rebounds 0.6%, but only after plumbing afresh six-week low. It gains most vs yen, Swiss franc andSwedish krona, up 1% against all three. * One of the quietest days in weeks for the U.S. bondmarket, with the 10- and 30-year yields recording their smallestmoves since May 9. Each barely moves a basis point. * Oil rises for a second day, with Brent and WTI futuresup around 2%, on geopolitical tensions and supply worries. * Gold slips almost 1% but earlier in the day hits$3,392/oz, its highest since May 8. Market inflection points abound Evidence is mounting that global economic activity is slowing, but this is failing to move the dial much for markets. Investors know growth is slowing and that the second half of the year will be challenging, so that's already 'in the price'. Hopes of a de-escalation in the trade standoff between the U.S. and China, and for bilateral deals between the U.S. and other key trading partners soon are supporting risk assets. The S&P 500 hit a three-month high on Tuesday, while the Nasdaq and MSCI World index climbed to levels last visited in February. It is the strength on Wall Street, most latterly tech, that is lifting global stocks as benchmark Asian and European indices are flatlining. On the whole, policymakers continue to stress that they are data-dependent and will move on rates carefully and calmly. That was the message from various Fed officials this week and Bank of England Governor Andrew Bailey on Tuesday. It's a slightly different - although no less challenging - situation in mainland Europe, where figures on Tuesday showed disinflationary forces are driving consumer prices as much as anything else. Euro zone inflation dipped below the European Central Bank's 2% target in May, cementing expectations rates will be cut this week and later this year. Meanwhile, Switzerland experienced outright year-on-year deflation for the first time in four years, raising the possibility that the Swiss National Bank may soon reintroduce negative interest rates. Canada's central bank is expected to hold interest rates at 2.75% on Wednesday for a second meeting. Growth and inflation have been surprisingly sticky this year, and rates have been slashed by 225 basis points since last June. As UBS analysts note, markets are generally at an inflection point, waiting for the catalyst that will break them out of the narrow ranges that have broadly held since the U.S. and China announced a temporary reduction on tariffs on May 12. Even Wall Street and the dollar - one creeping higher, the other drifting lower - are awaiting a trigger for a proper breakout. Could the telephone call between U.S. President Donald Trump and Chinese leader Xi Jinping expected later this week be it? Foreign exposure to U.S. assets may be lower than feared It is widely believed that investors around the world have a disproportionately high exposure to U.S. assets, particularly stocks, an imbalance that could roil U.S. markets if corrected. But what if these fears are overblown? Several eye-popping statistics suggest that America's weight in world financial markets is even greater than its outsized economic might. Most strikingly, the U.S. net international investment position (NIIP), or foreign investors' holdings of U.S. assets less U.S. investors' holdings of overseas assets, at the end of 2024 was $26 trillion. That's nearly 24% of global GDP, up from 16% only two years earlier, a surge driven by foreigners' insatiable appetite for U.S. equities, mainly "Big Tech". Demand was so hot that, by some measures, the value of U.S.-listed stocks at the turn of the year represented 74% of total global market cap. That share was 60% six years ago, and less than half in 2011. But the attractiveness of dollar-denominated assets is now being questioned, as the often erratic policies of U.S. President Donald Trump have upset longstanding economic and geopolitical norms, making governments and investors question whether Washington is still a reliable partner on the global stage. The concern is that this eroding confidence triggers a reversal of the massive flows into Wall Street seen in recent years that has damaging spillover effects. Such a correction may not require outright selling. Given the scale of the flows involved, just less buying among foreign investors could be enough to cast a shadow over the world's most important stock market. And the running assumption is foreign investors don't have the capacity or willingness to increase their exposure to U.S. assets, creating a significant long-term downside risk for Wall Street, Treasuries and the dollar. "A structural shift is underway: the slow erosion of US economic dominance," analysts at Deutsche Bank wrote on Monday. SKEPTICAL But looked at another way, foreign exposure to U.S. assets may not be as high as initially meets the eye. That's the view of analysts at JP Morgan, who measure portfolio investment in U.S. bonds and equities as a share of countries' total household sector financial assets. They use a broad definition for a country's "household" sector, covering investments by institutions like insurance companies and pension funds that are ultimately made on behalf of households. Using a broad range of data, from central banks, U.S. Treasury and OECD household financial asset flows, they measure the ratio of U.S. equity and bond holdings relative to household financial assets in each country. They find that "relative to the total financial assets of households in the rest of the world, the allocations to U.S. assets typically stand at around 10-20%." As a result, they are "skeptical of the idea that foreign investors hold too much of U.S. assets." Given that U.S. equities account for more than 70% of the MSCI global market cap and dollar-denominated bonds represent around 50% of global bond indices, according to JP Morgan estimates, the 10-20% exposure of foreign investors to U.S. assets does appear surprisingly low. And the 10-20% figure would be even lower were it not for the outsized U.S. equity holdings at the Swiss National Bank and Norway's sovereign wealth fund. On the bond side, foreigners' footprint in the U.S. Treasury market is shrinking. Data shows that they owned 31% of the $28.55 trillion outstanding Treasury debt at the end of last year. That share has been declining steadily since the Global Financial Crisis. In 2008, the figure was approaching 60%. Overseas investors' share of the T-bill market has shrunk even more. In December, it was under 20%, near its lowest level on record and sharply down from 50% a decade before. Nikolaos Panigirtzoglou and his team at JP Morgan aren't arguing investors will or should ramp up their purchases of U.S. assets. And in cases where allocations are high - such as the Taiwanese exposure to U.S. bonds or Canadians' holdings of U.S. stocks - diversification would hardly be a surprise. But there is "little indication" of broad-based selling of U.S. assets by foreign investors so far this year, they note. And if that selling does materialize, it may be far lighter than many expect. What could move markets tomorrow? * Australia GDP (Q1) * South Korea inflation (May) * South Korea GDP (Q1, revised) * UK services PMI (May) * Canada interest rate decision * U.S. services ISM (May) * U.S. ADP employment (May) * Federal Reserve releases Beige Book 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. (By Jamie McGeever; Editing by Nia Williams) Sign in to access your portfolio
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Trading Day: Market inflection points abound
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Stocks and the dollar rose solidly on Tuesday even though markets lacked a central, driving force - signs of weakening economic activity, cooling labor markets and disinflation are all reasons for caution, but risk appetite continues to be fueled by hopes that U.S.-China trade tensions will soon ease. In my column today I look at why foreign investors' exposure to U.S. assetsmay not be as high as feared. If it's not, the potential downside for Wall Street and Treasuries from diversification may be less severe. More on that below, but first, a roundup of the main market moves. If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Markets anxious as 'new cold war' turns hot: Mike Dolan 2. FX options market positioned for further dollar weakness 3. OECD lowers global outlook as Trump trade war hits 4. Japan to promote domestic ownership of JGBs, policydraft shows 5. G7 debt is now a pressure point for anxious markets Today's Key Market Moves * The S&P 500 hits a three-month high, rising 0.6% on theday, and the Nasdaq hits its highest level since February aftera 0.7% rise. * The dollar rebounds 0.6%, but only after plumbing afresh six-week low. It gains most vs yen, Swiss franc andSwedish krona, up 1% against all three. * One of the quietest days in weeks for the U.S. bondmarket, with the 10- and 30-year yields recording their smallestmoves since May 9. Each barely moves a basis point. * Oil rises for a second day, with Brent and WTI futuresup around 2%, on geopolitical tensions and supply worries. * Gold slips almost 1% but earlier in the day hits$3,392/oz, its highest since May 8. Market inflection points abound Evidence is mounting that global economic activity is slowing, but this is failing to move the dial much for markets. Investors know growth is slowing and that the second half of the year will be challenging, so that's already 'in the price'. Hopes of a de-escalation in the trade standoff between the U.S. and China, and for bilateral deals between the U.S. and other key trading partners soon are supporting risk assets. The S&P 500 hit a three-month high on Tuesday, while the Nasdaq and MSCI World index climbed to levels last visited in February. It is the strength on Wall Street, most latterly tech, that is lifting global stocks as benchmark Asian and European indices are flatlining. On the whole, policymakers continue to stress that they are data-dependent and will move on rates carefully and calmly. That was the message from various Fed officials this week and Bank of England Governor Andrew Bailey on Tuesday. It's a slightly different - although no less challenging - situation in mainland Europe, where figures on Tuesday showed disinflationary forces are driving consumer prices as much as anything else. Euro zone inflation dipped below the European Central Bank's 2% target in May, cementing expectations rates will be cut this week and later this year. Meanwhile, Switzerland experienced outright year-on-year deflation for the first time in four years, raising the possibility that the Swiss National Bank may soon reintroduce negative interest rates. Canada's central bank is expected to hold interest rates at 2.75% on Wednesday for a second meeting. Growth and inflation have been surprisingly sticky this year, and rates have been slashed by 225 basis points since last June. As UBS analysts note, markets are generally at an inflection point, waiting for the catalyst that will break them out of the narrow ranges that have broadly held since the U.S. and China announced a temporary reduction on tariffs on May 12. Even Wall Street and the dollar - one creeping higher, the other drifting lower - are awaiting a trigger for a proper breakout. Could the telephone call between U.S. President Donald Trump and Chinese leader Xi Jinping expected later this week be it? Foreign exposure to U.S. assets may be lower than feared It is widely believed that investors around the world have a disproportionately high exposure to U.S. assets, particularly stocks, an imbalance that could roil U.S. markets if corrected. But what if these fears are overblown? Several eye-popping statistics suggest that America's weight in world financial markets is even greater than its outsized economic might. Most strikingly, the U.S. net international investment position (NIIP), or foreign investors' holdings of U.S. assets less U.S. investors' holdings of overseas assets, at the end of 2024 was $26 trillion. That's nearly 24% of global GDP, up from 16% only two years earlier, a surge driven by foreigners' insatiable appetite for U.S. equities, mainly "Big Tech". Demand was so hot that, by some measures, the value of U.S.-listed stocks at the turn of the year represented 74% of total global market cap. That share was 60% six years ago, and less than half in 2011. But the attractiveness of dollar-denominated assets is now being questioned, as the often erratic policies of U.S. President Donald Trump have upset longstanding economic and geopolitical norms, making governments and investors question whether Washington is still a reliable partner on the global stage. The concern is that this eroding confidence triggers a reversal of the massive flows into Wall Street seen in recent years that has damaging spillover effects. Such a correction may not require outright selling. Given the scale of the flows involved, just less buying among foreign investors could be enough to cast a shadow over the world's most important stock market. And the running assumption is foreign investors don't have the capacity or willingness to increase their exposure to U.S. assets, creating a significant long-term downside risk for Wall Street, Treasuries and the dollar. "A structural shift is underway: the slow erosion of US economic dominance," analysts at Deutsche Bank wrote on Monday. SKEPTICAL But looked at another way, foreign exposure to U.S. assets may not be as high as initially meets the eye. That's the view of analysts at JP Morgan, who measure portfolio investment in U.S. bonds and equities as a share of countries' total household sector financial assets. They use a broad definition for a country's "household" sector, covering investments by institutions like insurance companies and pension funds that are ultimately made on behalf of households. Using a broad range of data, from central banks, U.S. Treasury and OECD household financial asset flows, they measure the ratio of U.S. equity and bond holdings relative to household financial assets in each country. They find that "relative to the total financial assets of households in the rest of the world, the allocations to U.S. assets typically stand at around 10-20%." As a result, they are "skeptical of the idea that foreign investors hold too much of U.S. assets." Given that U.S. equities account for more than 70% of the MSCI global market cap and dollar-denominated bonds represent around 50% of global bond indices, according to JP Morgan estimates, the 10-20% exposure of foreign investors to U.S. assets does appear surprisingly low. And the 10-20% figure would be even lower were it not for the outsized U.S. equity holdings at the Swiss National Bank and Norway's sovereign wealth fund. On the bond side, foreigners' footprint in the U.S. Treasury market is shrinking. Data shows that they owned 31% of the $28.55 trillion outstanding Treasury debt at the end of last year. That share has been declining steadily since the Global Financial Crisis. In 2008, the figure was approaching 60%. Overseas investors' share of the T-bill market has shrunk even more. In December, it was under 20%, near its lowest level on record and sharply down from 50% a decade before. Nikolaos Panigirtzoglou and his team at JP Morgan aren't arguing investors will or should ramp up their purchases of U.S. assets. And in cases where allocations are high - such as the Taiwanese exposure to U.S. bonds or Canadians' holdings of U.S. stocks - diversification would hardly be a surprise. But there is "little indication" of broad-based selling of U.S. assets by foreign investors so far this year, they note. And if that selling does materialize, it may be far lighter than many expect. What could move markets tomorrow? * Australia GDP (Q1) * South Korea inflation (May) * South Korea GDP (Q1, revised) * UK services PMI (May) * Canada interest rate decision * U.S. services ISM (May) * U.S. ADP employment (May) * Federal Reserve releases Beige Book 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. (By Jamie McGeever; Editing by Nia Williams) Error while retrieving data Sign in to access your portfolio Error while retrieving data Error while retrieving data Error while retrieving data Error while retrieving data
