Measures of risk appetite are improving this morning amid signs of an easing in last week’s bond market tantrum, and following a brief escalation in cross-Atlantic trade tensions. Equity markets are setting up for a near-1-percent advance at the open, Treasury yields are inching lower across the long end of the curve, and the dollar is strengthening as investors brace for a heavy slate of data releases in the coming days.
Bonds are rallying across the advanced economies on hints that Japanese authorities could take action to stem upward pressure on long-term yields. According to several media reports, the Ministry of Finance last night sent a questionnaire to fixed-income market participants in an attempt to assess current conditions and gauge appetites for long-dated issuance, suggesting that officials may work to shift bond supply toward shorter maturities, where demand is stronger. Given the importance of Japanese investment flows for US markets – and the role that the country’s borrowing costs play in providing an anchor for global rates – this is seen as potentially relieving pressure on governments elsewhere.
The euro is trading near Friday’s open, and is clinging to a circa-9.6-percent gain on a year-to-date basis after Donald Trump’s latest round of tariffs proved remarkably short-lived. In a social media post on Friday morning, the president said he planned to impose a 50-percent tariff on imports from the European Union by June 1 – triggering a steep selloff in global markets – only to postpone the action to July 9 on Sunday afternoon after “a very nice call” with European Commission President Ursula von der Leyen.
Further upside could be difficult to achieve. Global investors are moving to diversify their holdings outside the US, the European Central Bank’s Christine Lagarde has identified a “prime opportunity” for a “global euro moment,” and economic surprise indices have outperformed their American counterparts in recent months. But real-money investment flows only shift over long time horizons, optimism surrounding Germany’s recent fiscal expansion is likely to fade as bureaucratic delays dull its impact on the real economy, and rate differentials – traditionally the biggest factor in driving short-term euro-US exchange rate movements – remain heavily skewed toward the dollar. We struggle to see a sustained break above the 1.15 threshold happening in the absence of a violent breakdown in US economic data this summer.
In the US, durable goods orders and capital investment fell last month, underlining growing weakness in consumer demand and investment intentions. According to the Census Bureau, new orders for manufactured goods meant to last more than three years dropped -6.3 percent from the prior month in April, beating estimates for a -7.8-percent decline. But core capital goods orders—a measure of underlying investment in equipment that excludes volatile aerospace and defence-related categories—fell 1.3 percent month-over-month, down from a 0.3-percent gain in the prior month, suggesting that businesses are turning more cautious.
This week’s calendar is punctuated by potential volatility catalysts. Key economic data releases include this morning’s Conference Board consumer confidence index, tomorrow’s Federal Reserve meeting minutes, and the US personal spending and income report, along with Canadian gross domestic product numbers on Friday. Nvidia’s first-quarter earnings report after Wednesday’s close could trigger another round of turbulence, given the company’s enormous scale – with a market capitalisation larger than most countries – and its role as a bellwether for the global artificial intelligence boom.
Caution is warranted. Markets risk overreacting to potentially-transitory shifts in high-frequency data, given that highly complex “bullwhip effects” are radiating across the global economy as the technology investment cycle matures and the Trump administration’s policy reversals wreak havoc on consumer sentiment levels, supply chains, and investment plans. Economic policy uncertainty is likely to remain extraordinarily high, given that the president has now modified tariff levels at least 56 times since January 20 – and that he appears to see periods of calm as opportunities to enact more changes. Directional exchange rate forecasts are useless in this environment, and attempting to top-tick trends remains dangerous and futile – instead, it’s best to look at short-term market fluctuations as opportunities to lock in hedges at levels that are attractive from a bottom-line standpoint.
