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21-05-2025
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Trading Day: Bond alarms ring louder
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist U.S. debt despair Investors' unease about holding long-dated sovereign debt was magnified by a soft 20-year U.S. Treasury note auction on Wednesday, which slammed the dollar and stocks, pushed long bond yields higher and steepened the U.S. yield curve. In my column today I take a closer look at the rising term premium on U.S. debt. How much higher can it go? More on that below, but first, a roundup of the main market moves. I'd love to hear from you, so please reach out to me with comments at You can also follow me at @ReutersJamie and @ Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here. 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. Weak U.S. economic outlook persists despite brief tradetruce with China 2. What's in the Republican tax and spending plan? 3. Target cuts annual forecasts as tariff pressure mounts,demand slows further 4. Japan's portfolio reshuffle raises red flag for U.S.:Mike Dolan 5. UK inflation jumps in April, raising prospect of BoErate cut delay Today's Key Market Moves * Wall Street slides across the board, with the S&P 500losing 1.6%, the Nasdaq 1.4%, the Dow 1.9%, and the Russell 2000small-cap index shedding 2.6%. * Treasury yields surge as much as 13 bps at the long end ofthe curve - 10-year yield scales 4.60%; 20-year and 30-yearyields hit 4.13% and 5.10%, respectively, both the highest sinceOctober 2023. * Another down day for the dollar, as the dollar index falls0.5%, with the euro, Aussie dollar and yen the big winners. * The Japanese yen rallies for a seventh consecutive day, awinning streak last seen in March 2017. * Bitcoin rises to a record high just shy of $110,000,before easing back after the soft U.S. 20-year bond auction. Bond alarms ring louder After a poor 20-year government bond auction in Japan on Tuesday, it was the turn of a weak sale of 20-year U.S. debt on Wednesday to cast a cold, dark shadow over world markets and put investors on the defensive. The trouble is, when supposedly safe-haven sovereign bonds are at the root of the deepening market angst, the selloff takes on a more worrisome significance. And when it's U.S. Treasuries specifically, the cause for concern is even greater. Wednesday's auction of 20-year notes, the first sale of U.S. government debt since Moody's stripped the U.S. of its triple-A rating last week, drew softer demand than usual, but what soured sentiment and risk appetite was the high yield investors demanded. That was always going to be the case really - investors of all stripes from every corner of the world will buy Treasuries, the only doubt is the price. It was clearly lower than expected on Wednesday, and markets reacted accordingly. Washington's fiscal profligacy remains a major source of anxiety for bond investors. Non-partisan analysts say President Donald Trump's tax-cut bill proposals will add between $2 trillion and $5 trillion to the $36 trillion federal debt over the next decade. The 20-year Treasury note auction provided fuel for the bond fire, but fixed income was already smoldering on Wednesday - long-dated Japanese yields were at record highs and figures showed UK inflation rose much faster than expected to 3.5% in April, the highest in over a year. Tariffs, monetary stimulus, rising debt levels, poor fiscal discipline, growing policy risk, sticky inflation and soaring inflation expectations - these are some of the reasons investors around the world are reluctant to go long 'duration', or buy long-dated bonds. It's a potent mix, and all markets are feeling the heat. U.S. markets, in particular, are under pressure as the rest of the world reevaluates its holdings of dollar-denominated assets in light of Trump's global trade war and drive to upend the world economic order of the past 80 years. Steep declines in U.S. stocks, Treasuries and the dollar on Wednesday point to a nervy global session on Thursday. How much higher can the U.S. term premium go? A lot Financial markets have had a fairly muted reaction to Moody's decision to strip the United States of its triple-A credit rating last week, fueling hopes that the action will do little long-term damage to U.S. asset prices, as was the case when the U.S. suffered its first downgrade in 2011. But given today's challenging global macroeconomic environment and America's deteriorating fiscal health, that may be wishful thinking. To monitor the impact in the coming months, a key indicator to watch will be the so-called 'term premium' on U.S. debt. When Standard & Poor's Global became the first of the three major ratings agencies to cut America's top-notch rating in August 2011, there was little blowback because Treasuries were still widely considered the safest asset in the world. Demand for U.S. bonds went through the roof, despite S&P's landmark move, and yields and the term premium plummeted. That's unlikely to happen now. In 2011, the U.S. debt/GDP ratio was 94%, a record at the time reflecting a surge in government spending in response to the 2008-09 Global Financial Crisis. But the fed funds rate was only 0.25%, and inflation was 3% but falling. It dropped to zero a few years later and did not return to 3% until the pandemic in 2020. It's a vastly different picture today. U.S. public debt is around 100% of GDP and projected to rise to 134% over the next decade, according to Moody's. Official interest rates are above 4%, inflation is 2.3% but expected to rise as tariff-fueled price hikes kick in. Meanwhile, consumers' short- and long-term inflation expectations are the highest in decades. And while the $29 trillion Treasury market is still the linchpin of the global financial system, increasing U.S. policy risk is prompting the rest of the world to rethink its exposure to U.S. assets, including Treasuries - 'de-dollarization' is underway. HISTORICALLY LOW Put all that together, and it's easy to see why the 'term premium' - the risk premium investors demand for holding longer-term bonds rather than rolling over short-term debt - is liable to rise after this downgrade, unlike 2011. Especially given its relatively low starting point. True, the term premium was already the highest in a decade before the Moody's downgrade on Friday, and is now 0.75%, or 75 basis points. But that is still well below the level in 2011 and slim by historical standards. In July 2011, the term premium on 10-year Treasuries was over 2.0%, but quickly slumped after the S&P downgrade the following month to below 1% and was negative within a few years. Treasuries were downgraded, but their status as the world's undisputed safe-haven asset remained intact. The last time Uncle Sam's debt or inflation dynamics were as concerning as they are today, the term premium was much higher. It rose to 5% during the 'stagflation'-hit 1970s, and was around 4% following the 'Volcker shock' recessions in the early 1980s triggered by the Fed's double-digit interest rates to quell double-digit inflation. "The term premium has come up quite a bit recently and is likely going to rise more given the fiscal challenges the U.S. is facing," notes Emanuel Moench, professor at Frankfurt School of Finance & Management and co-creator of the New York Fed's 'ACM' term premium model. "The worry some investors might have is a self-fulfilling debt crisis – a high debt/GDP ratio increases interest rates, which raises the interest rate burden of the government and means you can't so easily grow yourself out of this anymore. This may push the term premium higher." FEEL THE SQUEEZE The question is, how high can it go? History suggests it can go a lot higher until Washington exerts some serious fiscal discipline, or until the squeeze on households, businesses and the federal government from higher market-based borrowing costs gets too much. Some analysts reckon another 50 basis points this year, which would take the 10-year yield up to around 5.00%, a pivotal level for many investors and the historical post-GFC high from October 2023. With fiscal uncertainty so high and policy credibility so low, it's a "tenuous" time right now for Treasuries, as Moench notes. The global environment is nervy too - Japan's 30-year yield this week soared to a record high. BlackRock Investment Institute strategists point out that long-term Treasuries still carry a "relatively low risk premium versus the past", and their "starting point" in their portfolio construction is to assume a rising term premium and "persistent" inflation pressure. They are underweight long-dated Treasuries. Treasuries will always attract buyers. It's just that the clearing price they accept may be lower, and the term premium they demand may be higher. The risk now is it's a lot higher. What could move markets tomorrow? * India, Japan, UK, Germany, euro zone, U.S. flash PMIs(May) * ECB's De Guindos, Escriva speak in Madrid * BoE's Sarah Breeden, Swati Dhingra, Huw Pill speak atvarious events * Richmond Fed President Thomas Barkin, New York FedPresident John Williams speak at separate events * U.S. weekly jobless claims * U.S. 10-year TIPS auction * G7 finance ministers and central bank chiefs meet inCanada 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
Yahoo
15-05-2025
- Business
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Trading Day: Inflation - calm before the storm?
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Softer bond yields cushion stocks Cooler inflation pressures in the shape of surprisingly soft U.S. economic data and a slide in oil prices helped bring down Treasury yields and support stocks on Thursday, although the recent surge on Wall Street does appear to be losing steam. In my column today I look at how the decline in U.S. inflation - a healthy development, in most people's eyes - is coming with an unwelcome side effect - rising real yields. More on that below, but first, a roundup of the main market moves. I'd love to hear from you, so please reach out to me with comments at You can also follow me at @ReutersJamie and @ Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here. 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. Trump promises to strengthen ties with United ArabEmirates on Gulf tour 2. Fed policymakers on hold to seek clarity from the data,but the data are not cooperating 3. APEC warns of stalling trade due to tariffs as China, USofficials meet 4. UK economy has a growth spurt before tax and tariffchallenges 5. Republicans embrace Trump's populist tax push withmidterms in mind Today's Key Market Moves * The Dow is the best performer of Wall Street's three mainindices, rising 0.65%. It's now right around the 200-day movingaverage of 42289 points. * The VIX volatility index closes at 17.81, its lowestclosing level since March 25. * Walmart shares fall as much as 5% after the retailerwarns on the outlook, but end the day only 0.5% lower. * Oil falls 2.5% on expectations for a U.S.-Iran nucleardeal, which could ease sanctions and free up more supply. * The yen is the big gainer in G10 FX, rising around 0.8%against the dollar ahead of Japan's Q1 GDP data on Friday. * South Korea's won rallies after a government official saysthe deputy finance minister met with a senior U.S. Treasuryofficial on May 5 to discuss the dollar/won market. * Gold hits a one-month low of $3,120/oz before reboundingto close at the day's high, up nearly 2% at $3,235/oz. Inflation - calm before the storm? A decline in European and U.S. bond yields provided the springboard for equity markets on Thursday. Or at least a cushion. Thursday's U.S. bond market rally will also have come as relief to policymakers in Washington as yields pulled back sharply across the curve, but not before longer-dated yields hit fresh one-month highs. The 10-year yield hit 4.55% and the 30-year yield reached 5.00% before sliding back. The recovery in global stock prices since the 'Liberation Day' tariff debacle early last month has been impressive, but understandably, that momentum is fading. For that momentum to be rekindled, a further decline in bond yields may be required. Although figures this week showed U.S. consumer and producer inflation cooled in April, tariffs have yet to bite and price pressures are tilted to the upside. Worries about the U.S. public finances are intensifying too. The Trump administration's plans to extend tax cuts, coupled with what many analysts consider to be a lack of commitment to reduce spending, will widen the budget deficit, perhaps to more than 7% of GDP. Add to that the apparent desire among foreign investors to reduce their exposure to U.S. assets, and Treasuries' safe haven allure has been diminished. Just when the deficit is widening. All of this means the 'term premium' - the extra compensation investors demand to hold longer maturity Treasuries rather than rolling over short-dated ones - is near the highest in over a decade. The yields on 10- and 30-year bonds are now not too far away from levels that were the norm before the Global Financial Crisis. Previous spikes in the term premium have cheapened bond prices sufficiently to attract overseas money back into the market, especially the 7-10 year part of the Treasury curve, says Bank of New York's John Velis. But this hasn't happened this time around, suggesting yields may have further to rise. It's notable that the 30-year yield fell only 5 basis points on Thursday, 3-4 basis points less than any other point on the curve. Meanwhile, the main focus for investors in Asia on Friday will be Japan's first quarter GDP figures. Economists polled by Reuters expect an annualized contraction of 0.2%, which would be a significant drop from the 2.2% expansion the previous quarter and the first in a year. These are backward-looking numbers but the immediate outlook is highly uncertain, at best - the tariff turbulence has put the yen back under pressure and has, according to many analysts, put the Bank of Japan's rate-hiking cycle on ice. US inflation progress stokes real yield problem Few would find fault with the steady, gradual decline in U.S. inflation, but it has recently come with an unwelcome side effect: rising 'real' borrowing costs. With the Federal Reserve's official policy rate on hold and the benchmark 10-year Treasury yield edging higher, inflation-adjusted interest rates – so-called real rates – are rising, effectively tightening monetary policy and financial conditions. The real yield on the 10-year Treasury note is now approaching 2.20%, the highest in a decade, based on the April headline annual CPI inflation rate of 2.3%. And the real fed funds rate has risen from a low of 1.50% in January to eclipse 2.00%, the highest in more than six months. While real borrowing costs are not at levels that will trigger alarm bells with Fed officials, CEOs or CIOs, the direction of travel is pretty clear, and is one more factor that could weigh on the activity of consumers, businesses, and investors in an environment already shrouded in a thick fog of uncertainty. Additionally, for policymakers, it shines a light on the constant struggle to determine the optimal interest rate at any given time. In Fed Chair Jerome Powell's press conference earlier this month after the central bank left its fed funds target range on hold at 4.25-4.50%, he said no fewer than eight times that rates are "in a good place". Current policy is "somewhat" and "modestly or moderately" restrictive, he added. The higher real rates grind, however, the tighter policy gets, unless the Fed resumes its easing cycle, which has been on pause following cuts of 100 basis points between last August and December. The tariff-fueled uncertainty and volatility of recent months has helped to extend that pause and, thus, enabled real rates to rise. R-STAR, MAN Real borrowing costs can send vastly different signals from their nominal equivalents. For example, Japan's official policy rate and long-dated bond yields are the highest in years, but the real policy rate is deeply negative and by far the lowest among the G4 central banks. In the U.S., the signaling behind today's rate moves is far from clear. If real yields are rising because investors are demanding a risk premium to hold dollars and Treasuries, then it's a cause for concern. If the upward shift reflects strong growth expectations, then that's much more positive. But, regardless, one thing is evident. The higher U.S. real rates grind, the further away they move from 'R-Star', the amorphous real rate of interest that neither stimulates nor crimps economic activity when the economy is at full employment. Two closely watched R-Star models partly constructed by current New York Fed President John Williams suggest the optimum real interest rate at the end of December was 0.8% or 1.3%, both the lowest in years. These figures will be updated for the January-March quarter at the end of this month. Fed rate-setters' median projection for the natural real interest rate is around 1.0%, and this view will be updated next month. These projections assume inflation at the Fed's 2% target, which it hasn't been for years. The R-Star concept has come under heavy criticism since the pandemic. Williams defended it in July last year, saying it is a fundamental part of all macroeconomic models and frameworks. "Pretending it doesn't exist or wishing it away does not change that." But he also cautioned that R-Star should not be "overly" relied upon when setting appropriate monetary policy "at a given point in time" given the uncertainty surrounding it. So as real rates move further away from this theoretical sweet spot, what, if anything, is the real-world impact? Right now, financial conditions are loosening as markets calm after the market turmoil wrought by the 'Liberation Day' tariff tantrum last month. But if you exclude that uniquely volatile episode, conditions have been steadily tightening since September last year, Goldman Sachs's U.S. financial conditions index shows. Further upside for real yields from here may be limited if inflation ticks higher in the coming months as Trump's tariffs kick in. But worries over U.S. debt and deficits are beginning to weigh on the long end of the bond market again. As investors continue to monitor countless economic variables to determine where the U.S. economy is heading, elevated real yields are one they should watch closely. What could move markets tomorrow? * Japan GDP (Q1) * Bank of Japan policymaker Nakamura Toyoaki speaks * ECB board member Philip Lane speaks * University of Michigan consumer confidence, inflationexpectations (May) * Richmond Fed president Thomas Barkin speaks 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)
Yahoo
15-05-2025
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- Yahoo
Trading Day: Inflation - calm before the storm?
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Softer bond yields cushion stocks Cooler inflation pressures in the shape of surprisingly soft U.S. economic data and a slide in oil prices helped bring down Treasury yields and support stocks on Thursday, although the recent surge on Wall Street does appear to be losing steam. In my column today I look at how the decline in U.S. inflation - a healthy development, in most people's eyes - is coming with an unwelcome side effect - rising real yields. More on that below, but first, a roundup of the main market moves. I'd love to hear from you, so please reach out to me with comments at You can also follow me at @ReutersJamie and @ Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here. 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. Trump promises to strengthen ties with United ArabEmirates on Gulf tour 2. Fed policymakers on hold to seek clarity from the data,but the data are not cooperating 3. APEC warns of stalling trade due to tariffs as China, USofficials meet 4. UK economy has a growth spurt before tax and tariffchallenges 5. Republicans embrace Trump's populist tax push withmidterms in mind Today's Key Market Moves * The Dow is the best performer of Wall Street's three mainindices, rising 0.65%. It's now right around the 200-day movingaverage of 42289 points. * The VIX volatility index closes at 17.81, its lowestclosing level since March 25. * Walmart shares fall as much as 5% after the retailerwarns on the outlook, but end the day only 0.5% lower. * Oil falls 2.5% on expectations for a U.S.-Iran nucleardeal, which could ease sanctions and free up more supply. * The yen is the big gainer in G10 FX, rising around 0.8%against the dollar ahead of Japan's Q1 GDP data on Friday. * South Korea's won rallies after a government official saysthe deputy finance minister met with a senior U.S. Treasuryofficial on May 5 to discuss the dollar/won market. * Gold hits a one-month low of $3,120/oz before reboundingto close at the day's high, up nearly 2% at $3,235/oz. Inflation - calm before the storm? A decline in European and U.S. bond yields provided the springboard for equity markets on Thursday. Or at least a cushion. Thursday's U.S. bond market rally will also have come as relief to policymakers in Washington as yields pulled back sharply across the curve, but not before longer-dated yields hit fresh one-month highs. The 10-year yield hit 4.55% and the 30-year yield reached 5.00% before sliding back. The recovery in global stock prices since the 'Liberation Day' tariff debacle early last month has been impressive, but understandably, that momentum is fading. For that momentum to be rekindled, a further decline in bond yields may be required. Although figures this week showed U.S. consumer and producer inflation cooled in April, tariffs have yet to bite and price pressures are tilted to the upside. Worries about the U.S. public finances are intensifying too. The Trump administration's plans to extend tax cuts, coupled with what many analysts consider to be a lack of commitment to reduce spending, will widen the budget deficit, perhaps to more than 7% of GDP. Add to that the apparent desire among foreign investors to reduce their exposure to U.S. assets, and Treasuries' safe haven allure has been diminished. Just when the deficit is widening. All of this means the 'term premium' - the extra compensation investors demand to hold longer maturity Treasuries rather than rolling over short-dated ones - is near the highest in over a decade. The yields on 10- and 30-year bonds are now not too far away from levels that were the norm before the Global Financial Crisis. Previous spikes in the term premium have cheapened bond prices sufficiently to attract overseas money back into the market, especially the 7-10 year part of the Treasury curve, says Bank of New York's John Velis. But this hasn't happened this time around, suggesting yields may have further to rise. It's notable that the 30-year yield fell only 5 basis points on Thursday, 3-4 basis points less than any other point on the curve. Meanwhile, the main focus for investors in Asia on Friday will be Japan's first quarter GDP figures. Economists polled by Reuters expect an annualized contraction of 0.2%, which would be a significant drop from the 2.2% expansion the previous quarter and the first in a year. These are backward-looking numbers but the immediate outlook is highly uncertain, at best - the tariff turbulence has put the yen back under pressure and has, according to many analysts, put the Bank of Japan's rate-hiking cycle on ice. US inflation progress stokes real yield problem Few would find fault with the steady, gradual decline in U.S. inflation, but it has recently come with an unwelcome side effect: rising 'real' borrowing costs. With the Federal Reserve's official policy rate on hold and the benchmark 10-year Treasury yield edging higher, inflation-adjusted interest rates – so-called real rates – are rising, effectively tightening monetary policy and financial conditions. The real yield on the 10-year Treasury note is now approaching 2.20%, the highest in a decade, based on the April headline annual CPI inflation rate of 2.3%. And the real fed funds rate has risen from a low of 1.50% in January to eclipse 2.00%, the highest in more than six months. While real borrowing costs are not at levels that will trigger alarm bells with Fed officials, CEOs or CIOs, the direction of travel is pretty clear, and is one more factor that could weigh on the activity of consumers, businesses, and investors in an environment already shrouded in a thick fog of uncertainty. Additionally, for policymakers, it shines a light on the constant struggle to determine the optimal interest rate at any given time. In Fed Chair Jerome Powell's press conference earlier this month after the central bank left its fed funds target range on hold at 4.25-4.50%, he said no fewer than eight times that rates are "in a good place". Current policy is "somewhat" and "modestly or moderately" restrictive, he added. The higher real rates grind, however, the tighter policy gets, unless the Fed resumes its easing cycle, which has been on pause following cuts of 100 basis points between last August and December. The tariff-fueled uncertainty and volatility of recent months has helped to extend that pause and, thus, enabled real rates to rise. R-STAR, MAN Real borrowing costs can send vastly different signals from their nominal equivalents. For example, Japan's official policy rate and long-dated bond yields are the highest in years, but the real policy rate is deeply negative and by far the lowest among the G4 central banks. In the U.S., the signaling behind today's rate moves is far from clear. If real yields are rising because investors are demanding a risk premium to hold dollars and Treasuries, then it's a cause for concern. If the upward shift reflects strong growth expectations, then that's much more positive. But, regardless, one thing is evident. The higher U.S. real rates grind, the further away they move from 'R-Star', the amorphous real rate of interest that neither stimulates nor crimps economic activity when the economy is at full employment. Two closely watched R-Star models partly constructed by current New York Fed President John Williams suggest the optimum real interest rate at the end of December was 0.8% or 1.3%, both the lowest in years. These figures will be updated for the January-March quarter at the end of this month. Fed rate-setters' median projection for the natural real interest rate is around 1.0%, and this view will be updated next month. These projections assume inflation at the Fed's 2% target, which it hasn't been for years. The R-Star concept has come under heavy criticism since the pandemic. Williams defended it in July last year, saying it is a fundamental part of all macroeconomic models and frameworks. "Pretending it doesn't exist or wishing it away does not change that." But he also cautioned that R-Star should not be "overly" relied upon when setting appropriate monetary policy "at a given point in time" given the uncertainty surrounding it. So as real rates move further away from this theoretical sweet spot, what, if anything, is the real-world impact? Right now, financial conditions are loosening as markets calm after the market turmoil wrought by the 'Liberation Day' tariff tantrum last month. But if you exclude that uniquely volatile episode, conditions have been steadily tightening since September last year, Goldman Sachs's U.S. financial conditions index shows. Further upside for real yields from here may be limited if inflation ticks higher in the coming months as Trump's tariffs kick in. But worries over U.S. debt and deficits are beginning to weigh on the long end of the bond market again. As investors continue to monitor countless economic variables to determine where the U.S. economy is heading, elevated real yields are one they should watch closely. What could move markets tomorrow? * Japan GDP (Q1) * Bank of Japan policymaker Nakamura Toyoaki speaks * ECB board member Philip Lane speaks * University of Michigan consumer confidence, inflationexpectations (May) * Richmond Fed president Thomas Barkin speaks 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) 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
Reuters
14-05-2025
- Business
- Reuters
Trading Day: S&P 500 completes 2025 round trip
ORLANDO, Florida, May 14 (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Eyes turn to Powell The powerful rise in risk and growth assets lost some steam as U.S. stocks ended mixed and oil slipped on Wednesday, although the losses were minimal, suggesting investors aren't ready to call a halt to the rally just yet. In my column today I look at the 'Global South', and how its time to shine may be now if the era of 'U.S. exceptionalism' forces a major shift in global capital and investment flows. More on that below, but first, a roundup of the main market moves. I'd love to hear from you, so please reach out to me with comments at opens new tab. You can also follow me at @ReutersJamie and @ Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here. 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. Today's Key Market Moves S&P 500 completes 2025 round trip The feelgood factor from the U.S.-China trade truce at the weekend continues to ripple through world markets, although the positive impact on prices is understandably fading. From a Wall Street perspective at least, now that the S&P 500 has recouped most of its losses and is now virtually flat for the year, it is an ideal juncture for investors to draw breath and assess the landscape. From a technical perspective, key equity indices are comfortably above the 200-day moving averages so the longer-term upward momentum would appear to be in place. Markets will be more balanced than they were a month ago. If anything though, the risk is some investors could now be leaning too heavily 'long' stocks - the Nasdaq is up 30% from its April 7 low - and 'short' bonds. A speech on the economy from Fed Chair Jerome Powell on Thursday might be pivotal for short-term direction. A Fed rate cut by September is now no longer fully priced into the rates futures curve, and traders barely see 50 basis points of easing this year. Contrast this with the depths of the tariff tantrum in early April when 100 bps of rate cuts this year, starting as early as June, was the consensus view. The more hawkish shift hasn't completely dented U.S. or global risk appetite though, as it has been driven by a sudden improvement in the economic outlook rather than a surge in inflation expectations. That said, U.S. fiscal concerns are back on investors' radar again. Figures from China earlier on Wednesday, meanwhile, showed that bank lending tumbled more than expected in April, underscoring the weakness of the domestic economy and the impact of heightened trade tensions with the United States. But these tensions have cooled considerably, and investors will have more positive, forward-looking signposts for direction. The news flow over the last 48 hours will have given them cause for cautious optimism. E-commerce retailer topped market estimates for quarterly revenue on Tuesday, Tesla plans to start shipping components from China to the U.S. for the production of Cybercab and Semi trucks soon, and Tencent Holdings' Q1 earnings beat forecasts. Tencent President Martin Lau also said stockpiles of AI chips should protect it from U.S. restrictions. Chinese and Hong Kong equities outperformed on Wednesday, with Hong Kong's headline and tech indexes rising more than 2%. Meanwhile, Thursday's calendar is overflowing with earnings results, policymaker speeches and economic data that could potentially move markets around the world. Perhaps the most important of them all will be Powell's remarks, his first public comments since last weekend's 'Geneva convention'. Calling the 'Global South', your time is ... now? The era of 'U.S. exceptionalism' may be over – and with it the Washington-led world economic and financial order of the last 50 years. This leaves investors with a big question, how will this reshape capital flows? The most obvious destination is Europe, home to the world's second-largest economy and second-biggest reserve currency, where markets are deep and liquid and the rule of law reigns supreme. The so-called 'Global South' may seem less attractive. Its 100-plus disparate countries, excluding China, carry the typical smorgasbord of emerging market risks, including political instability, legal concerns and policymaking credibility. But the global economic and investment landscape is changing rapidly and perhaps irrevocably, and investors may be skittish about once again finding themselves over-concentrated in any one region. Investors with long-term horizons and high risk thresholds may therefore increasingly consider boosting their allocations to this enormous and varied 'bloc'. These countries have long punched below their financial market weight. But could they be poised to benefit from a global capital reallocation shift? That's among the findings in a report published last week by Deutsche Bank strategists, 'The Global South: A strategic approach to the world's fourth bloc'. "The time for the Global South is now," states the report, which broadly defines the bloc as the 134 member countries of the G77 group of nations, excluding China, Russia, Singapore and a few others, adding in Mexico, Turkey and some central Asian countries. Some numbers here are worth noting. The group is home to almost two-thirds of the world's working age population, produces 40% of the world's energy and key transition metals, accounts for a quarter of global trade, and has attracted nearly a quarter of all inward FDI over the past decade. Indeed, the Boston Consulting Group says foreign direct investment in the Global South in 2023 totaled $525 billion, surpassing FDI into advanced economies of $464 billion. And while it is far too early to say how countries will align politically, economically, or militarily in the years ahead, there are already signs of rotation of capital into the Global South and away from China. Deutsche Bank's report notes that foreign investment into the Global South has held relatively steady in recent years while flows into China have collapsed to near zero. China's economic rise in recent decades has been one of the most astonishing in human history. In 1990, China accounted for only 2% of developed economies' GDP. By 2021 that figure had reached 33%, almost matching the Global South's then share. But China's growth rates have stalled, especially since the pandemic. The International Monetary Fund forecasts China's share of advanced economies' GDP will end this decade around 35%, while the Global South's share will rise to a new high of 40%. "In the event the U.S. trade war remains concentrated against China, the Global South could evolve into ... a source of diversification and value generation for investors," Deutsche Bank's analysts argue. From an equity allocation perspective, there is a lot of space to grow. The Global South made up a mere 11% of global market capitalization at the end of last year, with two countries - India and Saudi Arabia - accounting for more than half this share. If the dominance of U.S. equities wanes - they currently make up more than 70% of global market cap - even a tiny reallocation to this group could have a big impact on valuations in these countries. The risks, however, are manifold and many were on display during the market turbulence sparked by U.S. President Donald Trump's tariffs. Figures released by the Institute of International Finance last week showed that portfolio flows to emerging markets came to a "standstill" in April. While the Trump administration is rolling back its initial plan to slap enormous tariffs on much of South East Asia, investors may still be anxious about plowing too much capital into countries that could yet get caught in the U.S. crosshairs. "The current environment differs fundamentally from past episodes. This is not an exogenous shock but a deliberate policy action with structural objectives. As a result, the scope for rapid normalization is limited," the IIF said. But what really matters here are not "rapid" moves, but the structural changes in the global economy that the U.S. administration's unorthodox policies may have catalyzed. It's good to remember that Chinese exports to 'conductor economies' in the Global South have doubled since Trump's first trade war in 2018. Given how unreliable the U.S. now appears, it is reasonable to assume that both China and Europe may be seeking to further diversify their export markets. So perhaps the time is not 'now' for the Global South, but it could be coming soon. What could move markets tomorrow? 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.
Yahoo
13-05-2025
- Business
- Yahoo
Trading Day: No 'trade truce' hangover, party continues
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Risk assets extend gains Stocks, oil and bond yields rose on Tuesday, lifted by the optimism surging through markets that the worst of the global trade crisis is past and that the growth outlook is much brighter than it looked only a few days ago. In my column today I look at the market and economic chaos sparked by U.S. President Donald Trump's 'Liberation Day' tariff announcement and ask: was it worth it? More on that below, but first, a roundup of the main market moves. I'd love to hear from you, so please reach out to me with comments at You can also follow me at @ReutersJamie and @ Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here. 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. Trump's tariff blitz yields deals but misses globaltrade fix 2. 'Tariff Laffer Curve' reins in trade agenda: Mike Dolan 3. ANALYSIS-US tariff pause on Beijing puts pressure on'China-plus-one' countries 4. Forget Trump. A UK deal with the EU is what matters 5. INSIGHT-China's AI-powered humanoid robots aim totransform manufacturing Today's Key Market Moves * The S&P 500 and Nasdaq extend their rally, led by energyand tech. The S&P 500 is up 0.6%, the Nasdaq 1.6%. Weakness inhealthcare drags the Dow lower. * Germany's DAX rises for a fourth day, edging back uptoward the previous day's record high. It has now risen 13 outof the last 15 sessions. * Long-dated U.S. Treasury yields rise by up to 5 bps, withthe 10-year yield climbing back above 4.50% for the first timein a month. * Oil rises 2.5%, its fourth daily gain in a row. Brentand WTI futures have gained around 10% in those four days. * Sterling is the biggest gainer in G10 FX, rising 1% to$1.33 following hawkish comments from BoE chief economist HuwPill. No 'trade truce' hangover, party continues There was no hangover for world markets on Tuesday from the previous day's trade-fueled euphoria. Indeed, the party continued as stocks and bond yields climbed higher, and volatility declined further. The wave of relief that swept through world markets on Monday following the U.S.-China 'trade truce' was compounded on Tuesday by receding U.S. 'stagflation' fears after April inflation figures came in softer than economists had expected. Consumer prices rose at a 2.3% annual pace in April, the smallest gain since February 2021 and a sign that the Federal Reserve is still well-placed to deliver gradual interest rate cuts later in the year. The medium-term outlook for markets is still unclear. Uncertainty surrounding the path for tariffs, growth, and inflation this year is still high. But that's for another day. The last 48 hours have given some powerful rocket fuel for risk assets - a surprisingly rapid de-escalation in U.S.-Sino trade tensions, waves of upward revisions to Chinese and U.S. growth forecasts, and now the tamest U.S. inflation in over four years. The global inflation picture was also burnished on Tuesday by figures from India that showed consumer prices in the world's fifth-largest economy rose last month at the slowest pace in nearly six years. Of course, these are backward-looking numbers and tariff-affected inflation rates in the coming months will likely be higher. But they're still positive for risk appetite, and investors are willing to look on them favorably for now. Optimism on trade is running high. In Saudi Arabia on Tuesday, U.S. President Donald Trump secured a $600 billion commitment from the oil powerhouse to invest in the United States; a number of U.S. technology firms, including Nvidia and Advanced Micro Devices, announced artificial intelligence deals in the Middle East; and China has removed a ban on airlines taking delivery of Boeing planes. Sentiment toward China continues to improve, with several economists revising up their growth forecasts since the U.S.-Sino trade truce. On Tuesday, the yuan appreciated to its strongest level against the dollar since mid-November on the onshore and offshore spot markets. What was the point of April's market chaos? The fog of uncertainty created by U.S. President Donald Trump's trade war is suddenly lifting, although doubts over its longer-term economic impact will linger. As will another question: What was the point of all that 'Liberation Day' chaos and confusion? Trump, a consistent advocate of tariffs since the 1980s, made it very clear during his election campaign that he intended to significantly raise import levies. As the self-styled 'Tariff Man,' he vehemently argued that tariffs will help raise federal revenues, revitalize U.S. manufacturing, and reduce the country's yawning trade deficit. One can argue the economic merits of his agenda, but no one, in good faith, can express surprise that he did exactly what he said he would do. But even some of Trump's ardent backers are questioning the strategy and implementation. Was the aim to whip up economic and market chaos to gain maximum leverage over America's trading partners and thereby secure the most favorable terms for Washington in subsequent trade talks? Maybe. Short-term havoc was certainly wreaked, with some $6 trillion wiped off the value of U.S. stocks in the three days after 'Liberation Day.' But now deals are getting done and all those losses have been erased – except, of course, for investors who got spooked and sold. But after all that, it's unclear whether the tariffs that will result from these deals – which will likely be much lower than the extreme figures put forward a few weeks ago – will be significant enough to move the dial meaningfully on the U.S. trade deficit. And on the fiscal side, all tariffs announced so far this year are forecast to raise $2.7 trillion in federal revenue over the 2026-35 decade, up from an estimated $2.4 trillion before the U.S.-China 'truce' in Geneva, according to Yale Budget Lab, which pointed out that sky-high tariffs were far from 'revenue optimal.' Was the turbulence of the last several weeks worth an extra $30 billion a year, or 0.1% of GDP? Of course, $2.7 trillion is not to be sniffed at, but it comes at a cost. Yale Budget Lab also estimates tariffs will knock 0.7 percentage points off real U.S. GDP growth this year, and in the long run the U.S. economy will permanently be 0.4 percentage points smaller. The price level of goods across the country will be permanently higher too, economists reckon. Estimates vary, but the general view is that the global average effective tariff rate will be somewhere in the 13-18% range, down 10 percentage points from before the weekend truce but still the highest since before World War Two, and significantly higher than 2.3% at the end of last year. Meanwhile, U.S. consumer and business confidence has slumped to some of the lowest levels on record, and consumer inflation expectations are the highest in decades. These indicators may improve in the months ahead, but much spending and investment has been put on hold due to the uncertainty and likely won't be switched back on so quickly. LASTING DAMAGE Perhaps most importantly, the damage done to U.S. credibility hasn't vanished simply because asset prices have rebounded. Remember the methodology behind the Liberation Day figures, which saw some of the highest duties slapped on the world's poorest countries and tariffs imposed on frozen islands largely inhabited by penguins? This was widely ridiculed and called into question the seriousness of Trump's team, as have many of the other unorthodox policies the administration has been pursuing. Faith in America as a reliable partner has clearly been diminished. As HSBC currency analysts reminded readers on Tuesday, "Trust takes years to build, seconds to break and forever to remake." The administration appears to be trying to repair some of that reputational damage. It's notable that Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer led the delegation in Geneva this weekend rather than tariff hardliners like Commerce Secretary Howard Lutnick and Office of Trade and Manufacturing Policy director Peter Navarro. But fully restoring U.S. credibility won't be a quick fix. And the long-term consequences for U.S. rates, the dollar and U.S. assets overall could be meaningful. So if we consider where we are relative to a no-tariff scenario, U.S. growth will likely be slower, prices will likely be higher, and uncertainty will run much deeper. But would these costs be so burdensome had the administration taken a more pragmatic, less confrontational approach from the start? The wounds will heal, but the scars may last a long time. What could move markets tomorrow? * India wholesale price inflation (April) * Germany CPI inflation (April, final) * Bank of England Deputy Governor Sarah Breeden speaks * Federal Reserve Vice Chair Philip Jefferson speaks 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) 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
