Making sense of the forces driving global markets |
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We apologize for the technical issues that prevented the Trading Day newsletter from being delivered last Tuesday and Wednesday. Wall Street fell sharply on Monday as renewed global tariff uncertainty and rumbling software-fueled AI fears slammed shares and steered investors to the traditional safe-haven harbors of gold, Treasuries and the Swiss franc. In my column today, I look at how the disinflationary drag from oil prices is evaporating. As oil rises, the year-on-year price change is poised to turn positive, a potentially unwelcome inflationary impulse for policymakers to consider. I'd love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. |
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- STOCKS: Big U.S. indices in the red. South Korea, MSCI Asia ex-Japan hit new highs. Hong Kong +2.5%, but China -1.3%.
- SECTORS/SHARES: Surprisingly, six S&P 500 sectors rise, led by healthcare and consumer staples. But the other five lose at least 1%; financials -3%, biggest fall since April. IBM -13%, KKR -9%.
- FX: Mexican peso -1%, biggest decliner on the day. Norwegian crown -0.5%. Biggest gainers in G10 FX are safe-havens Swiss franc, Japanese yen. U.S. dollar slips, bitcoin -5% below $64,000.
- BONDS: Treasuries rally, pushing yields down as much as 7 bps at the belly of the curve.
- COMMODITIES/METALS: Oil hits 6-month high but ends lower, gold hits 3-week high above $5,200/oz, silver +5%.
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* Tariffied and confused Just when investors, businesses, and consumers thought they had weathered U.S. President Donald Trump's tariff storm, they face a new whirlwind of uncertainty and chaos, after the U.S. Supreme Court ruled that most duties were unlawful, and Trump immediately hit back with a new, temporary, 15% global levy. What does this mean for federal budget revenues, legal proceedings for tariff refunds, existing and future trade deals, the mid-term U.S. elections, inflation, and asset prices? The truth is, no one really knows. Amid so much uncertainty, investors are understandably going on the defensive. * Private credit fears - justified or not? Jitters continue to spread through the opaque world of private credit, with investors spooked by lenders' exposure to the battered U.S. software sector, liquidity concerns, and alternative asset manager Blue Owl halting redemptions at one of its funds. Blue Owl shares slid another 3% on Monday, meaning the firm has lost almost a quarter of its value this month. Shares in private credit giants Apollo and KKR slumped 5% and 9% on Monday, respectively. UBS analysts estimate that, in a worst case scenario, private credit defaults could rise 8% over the next year. |
* U.S.-RoW divergence widens As the U.S. software rout deepens - the sector is down 25% this year and has wiped out almost all its post-'Liberation Day' gains from April - the S&P 500 on Monday dipped back into negative territory for the year. The Nasdaq is down 3% and the Dow is still up 1.5% YTD, but compare the big three U.S. indices with their global peers - Europe's STOXX 600 is up 6%, Britain's FTSE 100 is up 8%, and Japan's Nikkei is up 12%. And look at chipmakers Taiwan and South Korea, where stocks are up 16% and 38%, respectively. Watch out for oil's disappearing disinflationary drag Oil prices have been a consistent disinflationary force for the U.S. and global economies since mid-2024. That may be about to change. Fueled by signs of a solid upturn in economic activity at the start of the year and bubbling U.S.-Iran tensions that could spark military conflict, Brent and West Texas Intermediate crude oil futures are the highest in nearly seven months. WTI and Brent on Monday hit six month highs above $67 a barrel and and $72/bbl, respectively, lifting their year-to-date gains to around 15% and nearly 20%. More importantly, from an inflation-calculation perspective, oil's rise means the year-on-year increase is dwindling rapidly, to the point that Brent is now only 1% cheaper than it was a year ago. In early January, it was down almost 30% on the year. |
In other words, the so-called "base effects" from oil are close to flipping to inflationary from deflationary. Oil's base effects have been mostly negative since August 2024, exerting downward pressure on annual inflation rates. If that changes, it may be harder for the Federal Reserve to justify interest rate cuts. |
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What could move markets tomorrow? |
- European Central Bank board members Pedro Machado and Anneli Tuominen speak at separate events
- U.S. house prices (December)
- U.S. Treasury sells $69 billion of two-year notes at auction
- U.S. Federal Reserve officials scheduled to speak include Chicago Fed President Austan Goolsbee, Atlanta Fed President Raphael Bostic, Boston Fed President Susan Collins, Richmond Fed President Thomas Barkin, Governors Lisa Cook and Christopher Waller
- U.S. President Donald Trump delivers State of the Union address (after U.S. markets close)
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. |
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