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3 days ago
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Trading Day: Trump-Musk feud slams stocks
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist There was plenty of meaty news for investors to get their teeth into on Thursday - U.S. President Donald Trump and Chinese Premier Xi Jinping's long-awaited phone call, a rate cut and guidance from the European Central Bank, and more soft U.S. labor market data. But the biggest market-mover of all? The public 'bromance' break up between Trump and Tesla CEO Elon Musk. In my column today I look at Wall Street's remarkable recovery from the post-'Liberation Day' depths of despair. The headwinds haven't gone away, but the 'hopium' rally could still have room to run. 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. Trump threatens Musk's government deals as feud explodesover tax-cut bill 2. U.S. stocks heal from tariff pain but trade news to keepmarkets edgy 3. Franc leading Swiss back to deflation vortex, assetstockpiling: Mike Dolan 4. Big central banks' forecasting lens gets fogged by 5. The world's auto supply chain is in the hands of a fewChinese bureaucrats Today's Key Market Moves * Tesla shares sink 14% after Trump lashes out at Musk,escalating a public spat between the two. Tesla shares are nowdown 33% this year. * The Nasdaq slides 0.8% and the S&P 500 falls 0.5%. * The dollar hits a 7-week low on an index basis. It's nowa whisker from taking out April's low and plumbing depths notseen in three years. * Sterling rises above $1.36 for the first time sinceFebruary 2022. * Silver hits a 13-year high of $36/oz, and platinum jumpsaround 5% to a 3-year high of $1,145/oz. Trump-Musk feud sinks stocks So, the Trump-Xi call to defuse trade tensions finally took place. The cynical view would be that it yielded nothing concrete other than an agreement to keep talking, suggesting China is standing firm and Trump may be forced into another major climbdown. The more optimistic take, which investors initially adopted, is that the talks were constructive and cordial, evidenced by the tone of Trump's social media post and the fact that the two invited each other to visit. But that's pretty thin gruel, and it wasn't enough to support Wall Street's initial gains. After hitting a record high for a second day, the MSCI All Country index ended the session flat. Investor sentiment was soured by the latest weekly jobless claims figures, the second warning from the labor market in 24 hours after Wednesday's ADP private sector employment report. If these trends are reflected in May's nonfarm payrolls on Friday, markets could be in for a rocky ride. Some of the U.S. economic gloom was offset by the U.S. trade deficit narrowing in April at the fastest pace ever, thanks to a collapse in imports as the front-running of purchasing goods from overseas ahead of tariffs ebbed. This bodes well for second quarter GDP growth, and the Atlanta Fed's GDPNow model estimate for second quarter growth was revised up a touch to an annualized 3.8%. Like the first quarter GDP contraction, however, the expected rebound in Q2 is completely driven by pre-tariff distortions in the trade data. Meanwhile, the European Central Bank cut interest rates for the eighth time since last June, by a quarter point to 2.00%. President Christine Lagarde signaled a pause in the easing cycle, telling reporters the bank is in a "good position" on monetary policy right now. But more cuts are likely to come, just a bit later this year than many economists had expected. Rates traders still see 50 bps of easing this year, with 25 bps cuts in September and December. Lastly, but by no means least, the 'bromance' between the world's most powerful man and its richest erupted into a rancorous public fight, as Trump threatened to cut off government contracts with companies owned by Musk. The 14% slump in Tesla shares dragged Wall Street into the red, casting a shadow over world markets going into the final trading day of the week. Wall Street's 'hopium' high not exhausted yet By any measure, the recent resilience of U.S. stocks is remarkable, with Wall Street powering through numerous headwinds to erase all its tariff-fueled losses and move into positive territory for the year. And although these headwinds haven't gone away, the rally may still have some juice left in it. Since the April 7 lows plumbed after U.S. President Donald Trump's 'Liberation Day' tariff debacle, the S&P 500 and Nasdaq are up 23% and 32%, respectively. 'Big Tech' has led the way, with the Roundhill 'Magnificent Seven' ETF gaining more than 35%. On the face of it, this is remarkable given that many of the concerns that sparked the crash – elevated U.S. import tariffs, tensions between the world's two largest economies, and chaotic and unorthodox policy out of Washington – remain in place today. Equity bulls are essentially betting that many things will go right in the coming months: the Federal Reserve will cut rates; no economic downturn; inflation won't spike despite the tariffs; U.S. tech companies will continue generating strong results; fiscal concerns in Washington will moderate; and perhaps most importantly, Trump will continue to back down on his most aggressive tariff threats – or to use the acronym de jour, investors are assuming the 'TACO' (Trump Always Chickens Out) trade will hold. That's a lot of stars aligning. Some of the biggest names in finance are skeptical, particularly regarding the U.S. fiscal outlook. Bridgewater founder Ray Dalio and JPMorgan CEO Jamie Dimon, both long-time deficit hawks, this week repeated their warnings that the U.S. debt is unsustainable. But these calls have fallen on deaf ears, or equity investors simply think any fiscal fallout will take years to materialize. SHORT-LIVED DIPS On the one hand, investors – especially the retail crowd believed to be driving this rally – appear to be overly optimistic. But looked at another way, U.S. equity investors may not be ignoring today's underlying risks, but simply viewing them less apocalyptically than they did a few months ago. Indeed, the overwhelmingly negative sentiment from earlier this year paved the way for the recent rebound. Sentiment among institutional investors reached extreme levels of bearishness in the wake of 'Liberation Day', and recession fears ballooned to historically high levels as well, Bank of America's April fund manager survey showed. Meanwhile, May's survey showed fund managers holding the biggest underweight position in U.S. equities in two years. When sentiment and positioning are that stretched, it doesn't take much for prices to snap back in the opposite direction. If the latest American Association of Individual Investors (AAII) Sentiment Survey is any guide, the snap back in equities still has room to run. Pessimism over the short-term outlook for U.S. stocks increased to an "unusually high" 41.9% last week, above its historical average of 31.0% for the 26th time in 28 weeks. As HSBC's multi-asset strategy team noted this week, it is precisely because these sentiment and positioning indicators are being kept "thoroughly in check" that market dips now are short-lived. It's also good to remember that even though Wall Street has erased its early losses and valuations are rising back towards their recent highs, U.S. stocks are still laggards this year. The S&P 500 is up only 1.5% in 2025 thus far, while the MSCI All Country World Index has jumped around 6%, hitting an all-time high on Wednesday. This suggests there may be room for U.S. outperformance on a relative basis in the coming weeks and months, though, of course, relative value metrics might still favor non-U.S. markets. This doesn't mean we should expect capital to start flooding back into the U.S. again. International institutional investors may continue to rethink their allocation to U.S. assets, creating a long-term risk to U.S. stocks. But for now, domestic U.S. investors are picking up the slack. What could move markets tomorrow? * India interest rate decision * Germany trade (April) * Germany industrial production (April) * Euro zone retail sales (April) * Euro zone GDP (Q1, revised) * U.S. non-farm payrolls, unemployment rate (May) * Canada employment (May) 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
3 days ago
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Trading Day: Trump-Musk feud slams stocks
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist There was plenty of meaty news for investors to get their teeth into on Thursday - U.S. President Donald Trump and Chinese Premier Xi Jinping's long-awaited phone call, a rate cut and guidance from the European Central Bank, and more soft U.S. labor market data. But the biggest market-mover of all? The public 'bromance' break up between Trump and Tesla CEO Elon Musk. In my column today I look at Wall Street's remarkable recovery from the post-'Liberation Day' depths of despair. The headwinds haven't gone away, but the 'hopium' rally could still have room to run. 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. Trump threatens Musk's government deals as feud explodesover tax-cut bill 2. U.S. stocks heal from tariff pain but trade news to keepmarkets edgy 3. Franc leading Swiss back to deflation vortex, assetstockpiling: Mike Dolan 4. Big central banks' forecasting lens gets fogged by 5. The world's auto supply chain is in the hands of a fewChinese bureaucrats Today's Key Market Moves * Tesla shares sink 14% after Trump lashes out at Musk,escalating a public spat between the two. Tesla shares are nowdown 33% this year. * The Nasdaq slides 0.8% and the S&P 500 falls 0.5%. * The dollar hits a 7-week low on an index basis. It's nowa whisker from taking out April's low and plumbing depths notseen in three years. * Sterling rises above $1.36 for the first time sinceFebruary 2022. * Silver hits a 13-year high of $36/oz, and platinum jumpsaround 5% to a 3-year high of $1,145/oz. Trump-Musk feud sinks stocks So, the Trump-Xi call to defuse trade tensions finally took place. The cynical view would be that it yielded nothing concrete other than an agreement to keep talking, suggesting China is standing firm and Trump may be forced into another major climbdown. The more optimistic take, which investors initially adopted, is that the talks were constructive and cordial, evidenced by the tone of Trump's social media post and the fact that the two invited each other to visit. But that's pretty thin gruel, and it wasn't enough to support Wall Street's initial gains. After hitting a record high for a second day, the MSCI All Country index ended the session flat. Investor sentiment was soured by the latest weekly jobless claims figures, the second warning from the labor market in 24 hours after Wednesday's ADP private sector employment report. If these trends are reflected in May's nonfarm payrolls on Friday, markets could be in for a rocky ride. Some of the U.S. economic gloom was offset by the U.S. trade deficit narrowing in April at the fastest pace ever, thanks to a collapse in imports as the front-running of purchasing goods from overseas ahead of tariffs ebbed. This bodes well for second quarter GDP growth, and the Atlanta Fed's GDPNow model estimate for second quarter growth was revised up a touch to an annualized 3.8%. Like the first quarter GDP contraction, however, the expected rebound in Q2 is completely driven by pre-tariff distortions in the trade data. Meanwhile, the European Central Bank cut interest rates for the eighth time since last June, by a quarter point to 2.00%. President Christine Lagarde signaled a pause in the easing cycle, telling reporters the bank is in a "good position" on monetary policy right now. But more cuts are likely to come, just a bit later this year than many economists had expected. Rates traders still see 50 bps of easing this year, with 25 bps cuts in September and December. Lastly, but by no means least, the 'bromance' between the world's most powerful man and its richest erupted into a rancorous public fight, as Trump threatened to cut off government contracts with companies owned by Musk. The 14% slump in Tesla shares dragged Wall Street into the red, casting a shadow over world markets going into the final trading day of the week. Wall Street's 'hopium' high not exhausted yet By any measure, the recent resilience of U.S. stocks is remarkable, with Wall Street powering through numerous headwinds to erase all its tariff-fueled losses and move into positive territory for the year. And although these headwinds haven't gone away, the rally may still have some juice left in it. Since the April 7 lows plumbed after U.S. President Donald Trump's 'Liberation Day' tariff debacle, the S&P 500 and Nasdaq are up 23% and 32%, respectively. 'Big Tech' has led the way, with the Roundhill 'Magnificent Seven' ETF gaining more than 35%. On the face of it, this is remarkable given that many of the concerns that sparked the crash – elevated U.S. import tariffs, tensions between the world's two largest economies, and chaotic and unorthodox policy out of Washington – remain in place today. Equity bulls are essentially betting that many things will go right in the coming months: the Federal Reserve will cut rates; no economic downturn; inflation won't spike despite the tariffs; U.S. tech companies will continue generating strong results; fiscal concerns in Washington will moderate; and perhaps most importantly, Trump will continue to back down on his most aggressive tariff threats – or to use the acronym de jour, investors are assuming the 'TACO' (Trump Always Chickens Out) trade will hold. That's a lot of stars aligning. Some of the biggest names in finance are skeptical, particularly regarding the U.S. fiscal outlook. Bridgewater founder Ray Dalio and JPMorgan CEO Jamie Dimon, both long-time deficit hawks, this week repeated their warnings that the U.S. debt is unsustainable. But these calls have fallen on deaf ears, or equity investors simply think any fiscal fallout will take years to materialize. SHORT-LIVED DIPS On the one hand, investors – especially the retail crowd believed to be driving this rally – appear to be overly optimistic. But looked at another way, U.S. equity investors may not be ignoring today's underlying risks, but simply viewing them less apocalyptically than they did a few months ago. Indeed, the overwhelmingly negative sentiment from earlier this year paved the way for the recent rebound. Sentiment among institutional investors reached extreme levels of bearishness in the wake of 'Liberation Day', and recession fears ballooned to historically high levels as well, Bank of America's April fund manager survey showed. Meanwhile, May's survey showed fund managers holding the biggest underweight position in U.S. equities in two years. When sentiment and positioning are that stretched, it doesn't take much for prices to snap back in the opposite direction. If the latest American Association of Individual Investors (AAII) Sentiment Survey is any guide, the snap back in equities still has room to run. Pessimism over the short-term outlook for U.S. stocks increased to an "unusually high" 41.9% last week, above its historical average of 31.0% for the 26th time in 28 weeks. As HSBC's multi-asset strategy team noted this week, it is precisely because these sentiment and positioning indicators are being kept "thoroughly in check" that market dips now are short-lived. It's also good to remember that even though Wall Street has erased its early losses and valuations are rising back towards their recent highs, U.S. stocks are still laggards this year. The S&P 500 is up only 1.5% in 2025 thus far, while the MSCI All Country World Index has jumped around 6%, hitting an all-time high on Wednesday. This suggests there may be room for U.S. outperformance on a relative basis in the coming weeks and months, though, of course, relative value metrics might still favor non-U.S. markets. This doesn't mean we should expect capital to start flooding back into the U.S. again. International institutional investors may continue to rethink their allocation to U.S. assets, creating a long-term risk to U.S. stocks. But for now, domestic U.S. investors are picking up the slack. What could move markets tomorrow? * India interest rate decision * Germany trade (April) * Germany industrial production (April) * Euro zone retail sales (April) * Euro zone GDP (Q1, revised) * U.S. non-farm payrolls, unemployment rate (May) * Canada employment (May) 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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30-05-2025
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Trading Day: Markets 'tarrified' anew
By Jamie McGeever ORLANDO, Florida (Reuters) - - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Bonds bounce back Global trade uncertainty cranked up several notches this week amid a flurry of court rulings around U.S. tariffs and President Donald Trump accusing China of violating a deal with Washington, ensuring world markets ended the month on a cautious footing. A clutch of economic indicators on Friday that suggested U.S. growth may be slowing more than expected also added to the gloom, making for a turbulent session on Wall Street. Month-end rebalancing flows were expected to be bullish for bonds, and that's how it appears to have turned out. After four consecutive weeks of declines, Treasuries' prices rebounded this week, particularly at the longer end, thereby bull-flattening the yield curve. The benchmark 10-year Treasury yield on Friday ended at a three-week closing low around 4.40%, partly capped by figures that showed U.S. PCE inflation last month cooled to 2.1% - to all intents and purposes back at the Fed's target. It's worth noting, however, that despite the renewed tariff chaos the S&P 500 and Nasdaq this week climbed to within a few percentage points of February's record highs. It won't take that much of a push to test them, although an impetus will be needed. What might provide that spark? The latest twists and turns on the Trump administration's tariffs, whether that's from the courts or the president's social media posts, appear to be the most likely trigger of major market moves. The U.S. Senate will start debating Trump's tax-and-spending bill - a "big, beautiful bill" as he has dubbed it - that, in its current form, is set to add nearly $4 trillion to the federal debt over the next decade. One element of the bill has unnerved investors in the last 24 hours, a tax targeting foreign investors that could potentially weigh on demand for U.S. Treasuries and the dollar. Deutsche Bank's George Saravelos warned that it could "turn the trade war into a capital war." The U.S. bond market is nervy, despite this week's rebound. The broad thrust from Fed officials' comments this week is policymakers remain in a 'wait and see' mode regarding the economic impact of the tariff uncertainty. Traders don't expect the Fed to cut rates again until September. Meanwhile, another expected interest rate cut from the European Central Bank on Thursday and May's U.S. employment report on Friday are among the highlights on next week's global calendar. I'd love to hear from you, so please reach out to me with comments at . You can also follow me at @ReutersJamie and @ This Week's Key Market Moves * U.S. Treasuries snap a four-week losing streak, with thelong end outperforming. But May is a bad month for bonds - theICE BofA Treasury index has its biggest fall this year. * Long-dated Japanese bond yields pull back from last week'srecord highs - the 40-year yield tumbles nearly 45 bps, itsbiggest ever weekly fall. * Many key equity indices have their best month sinceNovember 2023, including the MSCI World (up 5.5%) and Nasdaq (up9.5%). * Japan's Nikkei rises more than 5% in May for its bestmonth since February last year. * The MSCI Asia ex-Japan index snaps a six-week winningstreak, closing the week down 0.9%. * Nvidia shares soar 24% in May, their biggest monthly risein a year. May has been a good month for Nvidia shares of late,boosted by Q1 earnings - up 26% last year, and 36% in 2023. * The euro rises 0.4% in May, a negligible move in itselfbut enough to seal a fifth straight monthly gain, its longestmonthly winning streak since 2017. * Bitcoin falls 3% this week, retreating from the recordhigh of $112,000 to clock its first weekly decline in seven. Chart of the Week I'm feeling generous, so two charts for you this week. The first is from Simon French at Panmure Liberum. It shows that the gap between the UK 10-year bond yield and the aggregate yield of its G7 peers that exploded around the 'Trussonomics' debacle in late 2022 has not narrowed. More than two and a half years later, it is wider than ever. Investors are clearly demanding a massive premium for lending to the UK government over other G7 nations, but why? Possible explanations include: UK inflation is seen 'higher for longer', greater risk of fiscal slippage, policy credibility worries. The second chart might be gaining some attention - and raising hackles - in the White House. It shows the broadest measure of China's yuan exchange rate which, after a lengthy period of stability, has slumped to its weakest level since 2012. But unlike previous bouts of yuan weakness like the mid-2000s, this is not being driven by FX market intervention from Beijing, says OMFIF's Mark Sobel. In other words, less currency 'manipulation' and more capital outflows due to the huge challenges China's economy is facing. Either way, it will play into the narrative from Washington that global trade and currency imbalances must be fixed. But trade talks between the U.S. and China appear to have stalled, putting investors back on the defensive. Here are some of the best things I read this week: 1. Market Discipline Will Prevail in the U.S. - NourielRoubini 2. Making Sense of the New Global Economy - Dambisa Moyo 3. Failure to communicate is an economic policy risk 4. Today's global imbalances aren't what they used to be -Mark Sobel 5. Lagarde's euro 'battle cry' emphasizes EU cash need:Mike Dolan What could move markets on Monday? * Japan, UK, Germany, U.S. manufacturing PMIs (May) * U.S. manufacturing ISM (May) * Several Fed policymakers scheduled to speak at variousevents: Chair Jerome Powell, Governor Christopher Waller, DallasFed President Lorie Logan, and Chicago Fed President AustanGoolsbee 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. 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. (Writing 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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27-05-2025
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Trading Day: Japan spreads long bond relief
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Reasons to be cheerful A tariff reprieve from U.S. President Donald Trump, a surprise bounce in U.S. consumer confidence and a slide in government bond yields sparked a rally across most markets on Tuesday, particularly U.S. assets, with Wall Street, Treasuries and the dollar all outperforming. In my column today I look at how much the dollar may need to fall if the Trump administration is to succeed in making a significant dent in the U.S. trade deficit. 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. Long bond blues stress the 'bedrock': Mike Dolan 2. Japan to consider trimming super-long bond issuance,sources say 3. Japan net external assets hit record, but surrendersworld's top creditor spot 4. Investors see worsening US deficit outlook as tax billheads to Senate 5. Brussels seeks companies' US spending plans as Trumphails move toward talks Today's Key Market Moves * Wall Street has its best day in two weeks, with the S&P500 snapping a four-day losing run to gain 2% and the Nasdaqrising 2.5%. * Every sector on the S&P 500 rises. Consumer cyclicals leadthe way, up 3%, as investors bet on stronger growth. * Japan's 30-year bond yield slides 16 bps, its biggestfall since August 5 last year, one of its largest ever. The40-year yield's 25 bps fall is a record. * The 30-year U.S. Treasury yield slumps 9 bps, its biggestfall since April 4. * The dollar index rises 0.5%, driven by the greenback's1% rise against the yen, its best day in two weeks. Japan spreads long bond relief Global liquidity returned to more normal levels on Tuesday as UK and U.S. markets re-opened after the long weekend, and investors mostly scooped up whatever they could get their hands on. There were good reasons to feel bullish: President Trump extending his deadline for imposing 50% tariffs on European Union goods to July 9, relief at the long end of the Japanese Government Bond market, and a spike in U.S. consumer confidence. There will be more back-and-forth in Trump's tariff pronouncements in the weeks ahead, and there is a case to make that each positive turn will deliver diminishing returns for markets. The next big deadline is July 9, when Trump's pause on his reciprocal tariffs with the rest of the world also expires. Similarly, consumer confidence in the U.S. and elsewhere is liable to be volatile, difficult to predict amid such heightened uncertainty, and susceptible to the tariff headlines of the day. That said, if Trump's tariffs deliver a one-off price shock and no lasting inflationary pressure beyond that, consumer confidence may continue to improve. Economists at Citi, for example, forecast year-end inflation of 3.2%, not too much higher than the current rate of around 2.5-2.7% and well below some of the gloomier forecasts of 4% or higher. Perhaps the most interesting market moves of the day came from Japan, where ultra-long JGB yields clocked some of their steepest one-day falls after sources told Reuters the Ministry of Finance may consider trimming issuance of long-dated paper. These yields had last week spiked to record highs on growing jitters about Tokyo's deteriorating public finances and an alarming drop off in investor demand. Tuesday's rally in JGBs spread to long-dated U.S. bonds, which have also come under heavy selling pressure on concerns about Washington's fiscal indiscipline and drawn weak demand at auction too. Analysts at Morgan Stanley on Monday recommended going outright long on 10-year Japanese Government Bonds at 1.505%, which was the yield's high that day. But they remain more cautious on the long end, despite Tuesday's rebound. A more "lasting solution" to the recent market turbulence, they argue, will require an increase in Bank of Japan purchases or less supply from the Ministry of Finance. Or both. Looking ahead to Wednesday, the global session will kick off with an expected interest rate cut in New Zealand, span a 40-year bond auction in Japan and a five-year note sale in the United States, and wrap up with chipmaker Nvidia's quarterly earnings after the Wall Street close. Historic dollar fall needed to eliminate US trade deficit If the United States is to significantly reduce or, whisper it, eliminate its trade deficit, the dollar will probably have to weaken a lot. How much is unclear, though, as history shows large dollar declines are rare and have unpredictable consequences for trade. Reducing the U.S. trade deficit is the key goal of Trump's economic agenda because he believes it reflects decades of other countries "ripping off" America to the tune of hundreds of billions of dollars annually. Stephen Miran, chair of the Council of Economic Advisers, published a paper in November titled "A User's Guide to Restructuring the Global Trading System" in which he argued that the dollar is "persistently over-valued" from a trade perspective. "Sweeping tariffs and a shift away from strong dollar policy" could fundamentally reshape the global trade and financial systems. If a weaker exchange rate is the Trump administration's goal, it is on the right track, with the greenback down nearly 10% this year on the back of growing concerns over Washington's fiscal trajectory and policy credibility, as well as the end of "U.S. exceptionalism" and the "safe haven" status of Treasuries. But it is good to remember that a 15% fall in the dollar during Trump's first term had no impact on the trade deficit, which remained between 2.5% and 3.0% of GDP until the pandemic. Making a dent in the U.S. deficit will therefore require a much bigger move. WEIGHT OF HISTORY Reducing the trade deficit will be a challenge, eliminating it without a recession, a historic feat. The United States has run a persistent deficit for the past half-century, as insatiable consumer demand has sucked in goods from around the world and voracious appetite for U.S. assets from overseas has kept capital flowing stateside. The only exception was in the third quarter of 1980, when the U.S. posted a slender trade surplus of 0.2% of GDP, and trade with the rest of the world almost briefly balanced in 1982 and 1991-92. But these periods all coincided with - or were the result of - sharp slowdowns in U.S. economic activity that ultimately ended in recession. As growth shrank, import demand slumped and the trade gap narrowed. The dollar only played a significant role in one of them. In 1987, the trade gap was a then-record 3.1% of GDP. But it had almost disappeared by the early 1990s, largely because of the dollar's 50% devaluation from 1985-87, its biggest-ever depreciation. That three-year decline was accelerated by the Plaza Accord in September 1985, a coordinated response between the world's economic powers to weaken the dollar following its parabolic rise in the first half of the 1980s. But that does not mean large depreciations always coincide with reductions in the trade deficit. The dollar's second-largest decline was a 40% fall between 2002 and mid-2008, just before Lehman Brothers collapsed. But the U.S. trade deficit actually widened throughout most of that period, peaking at a record 6% of GDP in 2005. While it had shrunk by more than three percentage points by 2009, that was due more to plunging imports during the Great Recession than the exchange rate. These two episodes of deep, protracted dollar depreciation stand out because over the past 50 years, the dollar index has only had two other declines exceeding 20%, in 1977-78 and the early 1990s, and a few other slides of 15-20%. None of these had any discernible impact on the U.S. trade balance. DEFICIT TO 'VANISH'? The U.S. administration is correct that the dollar is historically strong today by several broad measures. Given that Trump and Treasury Secretary Scott Bessent seem intent on rebalancing global trade, pressure on the greenback looks unlikely to lift any time soon. But how much would the dollar have to fall to whittle away the yawning trade deficit, which last year totaled $918 billion, or 3.1% of GDP? Hedge fund manager Andreas Steno Larsen reckons a 20%-25% depreciation over the next two years would see the deficit "vanish," while Deutsche Bank's Peter Hooper thinks a 20%-30% depreciation could be enough to "eventually" narrow the deficit by about 3% of GDP. "This means that a significant reversal of the roughly 40% appreciation of the dollar in real (price-adjusted) terms against a broad set of currencies since 2010 could be sufficient to get the current deficit back to a zero balance," Hooper wrote last week. History suggests this may be challenging without a severe economic slowdown. But that's a risk the administration seems prepared to accept. What could move markets tomorrow? * Australia CPI inflation (April) * New Zealand interest rate decision * Taiwan GDP (Q1, revised) * India industrial production (April) * Germany unemployment (April) * U.S. 5-year note auction * New York Fed President John Williams speaks at BOJ-hostedconference in Tokyo * Nvidia quarterly earnings after the closing bell 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 Bill Berkrot) Sign in to access your portfolio
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23-05-2025
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Trading Day: Trump shatters tariff calm with new salvo
By Jamie McGeever ORLANDO, Florida (Reuters) - - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Just when a degree of calm appeared to have settled over world markets, despite a worrying spike in many countries' long-term bond yields, U.S. President Donald Trump gave the world a stark reminder on Friday that his trade war is far from over. In threatening 50% tariffs on European goods effective June 1 and floating a 25% charge on Apple iPhones sold in the U.S., Trump shook investors from any complacency the recent de-escalation may have cultivated. European and U.S. stocks slumped - the S&P 500 sealed its steepest weekly fall since March - ensuring it will be a nervy and anxious long weekend for investors. U.S. and UK markets are closed on Monday for holidays. The optimistic view is this is a familiar negotiation tactic - come out all guns blazing, create chaos, secure concessions, retreat, then claim victory since whatever deal is struck is nowhere near as bad as the original worst-case scenario. Analysts at Citi are confident tariff fears are contained, and that a 50% levy on Europe won't last long even if it is implemented. The downside for risky assets is "manageable". This may be the path U.S.-Europe talks follow, as appears to be the case with the U.S.-China negotiations. But large doses of uncertainty and risk have been injected back into markets, and investors must price assets accordingly. Barclays economists estimate that if 50% tariffs on EU goods are realized, the overall trade-weighted tariff rate on all U.S. imports would rise to 21% from 14%, and an extra 0.5 percentage point hit to GDP growth would put the U.S. economy on the brink of recession. The other main focus for investors this week was sovereign bonds, specifically longer maturities, in many G7 countries including the U.S., Japan and Britain. Weak auctions, debt and deficit worries, and policy paralysis fears pushed long-dated yields to multi-year or record highs. Moody's stripping the U.S. of its triple-A credit rating a week ago also weighed on the price of Treasuries. Worryingly, rising U.S. Treasury yields offered no support to the dollar and finally started to weigh on Wall Street. Indeed, the slump in U.S. stocks immediately after Wednesday's 20-year note auction was the third-worst market reaction to a bond auction ever, according to Kevin Gordon at Charles Schwab. The U.S. and UK holiday on Monday and month-end flows were always likely to distort markets next week. A re-escalation of global trade tensions and historically high bond yields are now in the mix too. I'd love to hear from you, so please reach out to me with comments at . You can also follow me at @ReutersJamie and @ This Week's Key Market Moves * Wall Street's main indexes end the week lower, with theS&P 500 shedding 2.6% for its worst week since the end of March. * Apple shares' fall on Friday extends their weekly declineto 7.5%. They've fallen eight straight days, their worst runsince January 2022. * European stocks rise for a sixth straight week, but onlyjust. Germany's DAX hits a record high above 24000 points and isup 30% from its April 7 low. * The dollar index falls nearly 2%, its first weekly loss infive. * Japan's 30-year bond yield spikes 10 bps in the week to arecord high just shy of 3.20%. U.S. and UK equivalents also hithistoric highs of 5.16% and 5.60%, respectively. Chart of the Week The dollar's slide is remarkable. I wrote this week that while there are many valid long-term reasons to be bearish on the dollar - fiscal woes, policy credibility, end of 'U.S. exceptionalism', de-dollarization, to name a few - the pace of selling was unsustainable and a short-term reversal appeared likely. The dollar's lurch lower on Friday following Trump's latest tariff salvos puts any correction on ice. But it's still on the cards, if the breakdown in the dollar's correlation with yield spreads is any guide. The dollar's link to U.S.-euro zone yield spreads is usually very tight - when the dollar's yield advantage widens, the currency rises; when it shrinks, the dollar weakens. But that correlation collapsed completely round about ... Liberation Day. The link is broken, but history suggests it won't be for long. Here are some of the best things I read this week: 1. Why is the Federal Reserve independent, and what doesthat mean in practice? - Brookings 2. Fed framework review should tackle communication issues- OMFIF 3. Tariffs as Cost-Push Shocks: Implications for OptimalMonetary Policy - NBER 4. Demand versus Supply: Which Is More Important forInflation? - San Francisco Fed 5. Farewell, America - Carl Bildt What could move markets on Tuesday? (U.S. and UK markets are closed on Monday) * South Korea consumer sentiment * Hong Kong trade (April) * Bank of Japan Governor Kazuo Ueda speaks * Germany GfK consumer sentiment (June) * U.S. 2-year Treasury note auction * U.S. durable goods (April) * U.S. consumer confidence (May) * Minneapolis Fed President Neel Kashkari 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. 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. (Writing 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
