By Jamie McGeever
ORLANDO, Florida (Reuters) – TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Glass half empty again
The optimism that infused Asian and European markets on Monday evaporated as the global trading session progressed, with U.S. investors taking a ‘glass half empty’ view on the current global uncertainty surrounding tariffs and outlook for economic growth.
Wall Street’s underperformance ended up being pretty marginal, but there is little doubt that a re-rating of U.S. assets is underway. More on that below, but first, a roundup of today’s moves on world markets.
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.
If you have more time to read today, here are a few articles I recommend to help you make sense of what happened in markets today.
Today’s Key Market Moves
Play it safe, Uncle Sam
The selling frenzy that rocked world markets three weeks ago may have stopped, but the relief rally that followed now appears to be fading, leaving investors nervously awaiting the next signal.
Absent an obvious catalyst like a surprise U.S.-China deal on trade, markets will likely lack direction this week but remain choppy. Several events, including month-end rebalancing, U.S. ‘Big Tech’ earnings, a Bank of Japan policy meeting and U.S. Q1 GDP and April payrolls, should see to that.
Benchmark equity indexes in Brazil, India and Japan have fully recovered their post-‘Liberation Day’ losses, Germany’s DAX on Monday briefly revisited its April 2 close, while the MSCI All Country World Index and Asia ex-Japan index are both within a whisker of regaining their April 2 closing levels too.
U.S. President Donald Trump cooling his more belligerent rhetoric on tariffs and Federal Reserve Chair Jerome Powell have certainly helped calm the horses, and financial conditions around the world are beginning to loosen again.
The dollar’s continued decline has been a big part of that loosening, and the greenback retreated again on Monday. Many banks have slashed their long-term dollar forecasts, and there’s a case to make that a weaker dollar would be a tailwind for markets and growth around the world in the years ahead.
But does that still apply if the dollar is slumping for negative reasons, like a global loss of faith in U.S. policy? What’s more, stronger domestic exchange rates will harm non-U.S. companies’ earnings and eat into their profit margins. Throw that on top of the tariffs that have still to come into effect, and it’s easy to see why the recent sense of relief across markets is fading.
Companies in Europe, where the euro has surged around 10%, and Japan, where corporate sensitivity to the exchange rate is always high, may be particularly exposed.
UBS strategists argue that a diversified global portfolio should still include “substantial exposure to the world’s largest economy and most developed financial markets,” and in the more immediate term, they see scope for a ‘tactical’ recovery in U.S. risk assets, as has often been the case following periods of high volatility and investor pessimism.
But many will argue this can’t last. Trade and economic uncertainty is too high, visibility is non-existent, and the damage done to markets and investor and business confidence runs much deeper than seems apparent right now.
The great US re-rate has begun
The panic selling of U.S. stocks and bonds following the Trump administration’s ‘Liberation Day’ tariff bombshell may be over, but the re-rating of American assets is just getting started.
The question is just how big this reallocation will be. Money managers are aware that even a modest reduction in exposure could have a potentially huge impact on asset prices.
That’s both because of the sheer size of U.S. markets relative to total global assets, and the outsized nature of overseas investors’ U.S. holdings in nominal terms and as a share of their portfolios. In Treasuries, this overweight exposure is large; in equities it is massive.
To illustrate the big impact that even small changes in allocations could have, it’s worth recalling some of the numbers involved here.
For instance, the global pension fund industry, which is significantly overweight U.S. assets, is worth around $58.5 trillion.
Foreign private sector investors have flooded U.S. markets in recent years, pouring a net $3.25 trillion into U.S. assets over the last three full calendar years, according to U.S. Treasury data. Consequently, America’s net international investment position is currently negative $26 trillion.
U.S. stocks accounted for as much as 75% of the $80 trillion global market cap earlier this year. And at the end of last year, foreign investors owned 18% of U.S. stocks, a record-high share going back to 1945, according to strategists at Goldman Sachs.
Additionally, Japanese and euro zone investors’ U.S. fixed income allocations comprise around 60% of their foreign fixed income holdings and about 15% of their total fixed income portfolios, according to strategists at Exante Data. European investors’ U.S. allocation has roughly doubled over the last decade, they note.
PENDULUM SWUNG TOO FAR?
Looking ahead, the concern is not that we will see blanket selling of U.S. assets by foreign investors or that the dollar will no longer be considered the world’s reserve currency. Those scenarios will probably not happen in our lifetimes.
But we are likely to see modest shifts that could have major price impacts. Anecdotal evidence suggests some Canadian and European pension funds that have baulked at the Trump administration’s trade, economic and wider policy agendas, have already started reducing exposure to U.S. assets. They won’t be the only ones.
“I think the coming months will see global portfolios moderately reduce U.S. allocations, more so overseas investors than domestic U.S. investors,” says Rebecca Patterson, former chief investment strategist at Bridgewater Associates.
If global investors do trim their U.S. holdings, there will be both a one-off hit to asset prices and a long-term reduction in upside potential because the level of future demand will be weaker.
This will be mitigated if U.S. investors fill the gap. But that could be difficult.
At the end of last year, U.S. households’ equity holdings as a share of their total assets and total financial assets were at record highs of 29.5% and 43.5%, respectively. Exante Data’s team notes that around 95% of U.S. investors’ fixed income holdings are already allocated domestically.
The ‘anti-U.S.’ pendulum may have swung too far in recent weeks. Bank of America’s April global fund manager survey found that a record share of investors intend to cut their U.S. stock holdings, the U.S. corporate profit outlook is the gloomiest since 2007, and the outlook for the U.S. dollar is the most bearish since 2006.
The risk premium on U.S. markets has risen, with bond yields up and the ‘term premium’ on the U.S. 10-year Treasury note the highest in a decade. And for good reason, given the volatility seen since President Donald Trump’s April 2 tariff announcement.
Prices are adjusting, as they should. How long that adjustment will take and how deep it will be remains to be seen.
The unmatched depth, liquidity and dynamism of U.S. financial markets are not in doubt. But in the new world order fast emerging from the Trump administration’s ‘America First’ drive, U.S. assets’ relative attractiveness certainly is.
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, is committed to integrity, independence, and freedom from bias.
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(By Jamie McGeever, editing by Bill Berkrot)
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