Making sense of the forces driving global markets |
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Wall Street rose to new highs on Monday, lifting global stocks to fresh peaks in the process as investors cheered the latest multi-billion dollar agreement - and one of the biggest - in the booming U.S. tech and artificial intelligence space. More on that below. In my column today I look at how, by some measures, U.S. pension funds and households hold record amounts of equities. This is good news right now as stocks continue to outperform bonds. But can it last? 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. |
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- STOCKS: New peaks for MSCI World, S&P 500, Nasdaq, Dow. Argentina stocks +7.5%.
- SHARES/SECTORS: Nvidia shares +4% to new high. U.S. tech biggest sector gainer, +1.7%. Communications services, consumer staples both -0.9%.
- FX: Dollar down broadly, euro among biggest G10 gainers +0.5%. Argentina's peso bounces 4% on strong US support for the Millei government.
- BONDS: Japanese Government Bond yields highest since 2008 on hawkish BOJ signals Friday. U.S. yields up but no more than 3 bps at front end, curve bear flattens slightly.
- COMMODITIES: Gold notches another high, silver another 14-year peak.
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* U.S. immigration The Trump administration's immigration crackdown is not just on the lower skilled, lower income end of the foreign worker spectrum at the country's Southern border - the new $100,000 fee for H-1B visas targets highly-skilled workers in specialty fields, mainly from India and China. Tech could be hit hardest. Setting aside the politics, the macroeconomic impact of tighter immigration controls is negative. If GDP growth is the increase in labor supply plus the productivity growth of those extra workers, then less immigration equals less growth. And it looks like workers at both ends of the skills spectrum are in the administration's sights. * AI spend frenzy The recent flurry of agreements and tie-ups between U.S. tech firms exploded on Monday with chipmaker Nvidia committing to invest up to $100 billion in OpenAI. It's the latest example of companies pouring billions of dollars into securing and expanding capacity for powerful cloud computing required to develop and power complex AI technology. Nvidia shares, the semiconductor and tech sectors, and Nasdaq and S&P 500 indices leaped to new highs. These are huge investments that raise the bar on future returns, potentially a headwind for markets in the months or years ahead. But not today. |
* Politics and Palestine It may not be a global market-mover, but it's a moment in global political history. As global leaders converge on New York this week for the UN General Assembly, Britain, France and many other countries have recognized or are expected to formally recognize a Palestinian state. Israel and the US have rejected the notion out of hand, and U.S. President Donald Trump will address the UN on Tuesday. For investors, the most significant aspect of this may be how it affects US relations with other major countries over the longer term. |
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| US savers go all in on 'cult of equity' |
U.S. pension funds and households have never held more equities as a share of their overall assets, by some measures, raising questions about whether the long-term shift towards stocks has run its course or whether investors have truly undergone a paradigm shift. There are compelling arguments on both sides of that debate, but what's not in dispute are the numbers. The share of stocks in U.S. private sector defined contribution (DC) pension plans is now approaching 70%, while equities as a share of U.S. households' financial assets is a record 45.4%. John Higgins, chief markets economist at Capital Economics, notes that DC pension plans' equity exposure is the highest in at least 75 years. This largely reflects the decades-long shift away from defined benefit (DB) schemes, where the risk of retirement savings lies with the employer, and toward DC plans, where employees assume more of the burden. |
Broadly speaking, DB plans tend to invest more in bonds, especially long-dated ones, to match the funds' longer-dated liabilities, while DC plans are equity-heavy, as individuals don't have liabilities to match and so will be more likely to lean towards stocks offering higher returns – and higher risk. In the 1950s, more than 90% of all U.S. pensions were DB plans, and less than 20 years ago the split was roughly 50-50. But now, almost 80% are DC plans. In that sense, investors are in a brave new world – and it could be an increasingly risky one, given that DC plans are so highly exposed to Wall Street at a time when U.S. stock market valuations are looking stretched. |
What could move markets tomorrow? |
- September PMI releases start to roll in, including euro zone and US
- Bank of England chief economist Huw Pill speaks
- ECB board member Claudia Buch speaks
- U.S. current account (Q2)
- U.S. Treasury auctions $69 billion of two-year notes
- U.S. Fed officials scheduled to speak include Chair Jerome Powell, Governor Michelle Bowman, and Atlanta Fed President Raphael Bostic
- Bank of Canada Governor Tiff Macklem speaks
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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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