Making sense of the forces driving global markets |
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U.S. stocks slid on Tuesday in a wave of profit-taking from the previous day's highs, as investors digested cautious remarks from Federal Reserve Chair Jerome Powell and data that showed U.S. business activity slowing for a second straight month. In my column today I look at who is paying the record tariffs swelling U.S. Treasury coffers. So far, U.S. companies have taken the pain, but that burden is expected to shift to consumers. Will they be willing - or able - to "eat the tariffs"? 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: Taiwan hits new highs, China slips to 3-week low. Wall Street falls, Dow and Russell 2000 outperform.
- SHARES/SECTORS: U.S. consumer discretionary, tech lead the decline. Energy +1.7%. Oracle shares -4.4%, Nvidia -2.8%; biggest climber is Halliburton, +7.3%.
- FX: Dollar remarkably stable vs G10 FX, but much choppier vs EM. Argentina peso +3%, Brazil's real +1%, India's rupee hits record low near 89/$.
- BONDS: Treasury yields fall, as much as 3 bps at long end to bull flatten the curve. Two-year auction draws 2.51x bid/cover.
- COMMODITIES: Gold hits new high $3,790/oz, platinum +4% to new 11-year high. Oil up around 2% on supply issues.
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* U.S. government shutdown It's that time of year again, where budget gridlock in Washington threatens to trigger a U.S. government shutdown and, in the worst case scenario for markets, some form of technical default. We are eight days away from what would be the 15th partial shutdown since 1981. Uncertainty and volatility could ripple through markets until agreement on government funding is reached, which history shows is often at the 11th hour. Investors won't be getting complacent though, and on Tuesday President Trump raised the stakes, scrapping a meeting with Democratic leaders. Eight days and counting. * (Dis)United nations? The United Nations 80th General Assembly roared into life on Tuesday, with U.S. President Donald Trump center stage. In a 56-minute combative speech, Trump rejected the idea of a Palestinian state, urged Europe to pressure Russia to force an end to the war in Ukraine, and told leaders of nations he deems soft on immigration: "Your countries are going to hell." Meanwhile, in a nod to U.S. foreign policy, Brazil's Luiz Inacio Lula da Silva said recent "unilateral attacks" against Brazil's institutions and economy were unacceptable. Despite that, Trump said he will meet Lula next week, adding that they had "excellent chemistry" during a brief encounter at the U.N. * Golden years Gold rose as much as 1% on Tuesday, hitting a new peak and bringing $4,000/oz closer into view. It is up a whopping 45% this year, and recently scaled its previous inflation-adjusted high from 1980 of around $3,500/oz. |
Inflation worries are a factor, but there must be more to it - if it was just inflation, long-dated yields would be spiking and yield curves would be steepening sharply too. Geopolitical concerns, central bank demand, divestment out of fiat currencies and into hard assets must also be driving this. |
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Do US consumers have the appetite to eat the tariffs? |
In May, U.S. President Donald Trump lashed out at Walmart, telling the retail giant to "eat the tariffs" instead of raising prices for consumers. Corporate America heard the message. The consensus among economists is that Trump's tariff burden has so far been shouldered by U.S. companies and that consumers have got off relatively lightly, although these scales are widely expected to tip the other way in the coming months. How far remains to be seen. But given that consumer spending accounts for around 70% of annual U.S. economic activity, changes to the final price of imports could be a vital part in determining how growth and inflation rates pan out. The dust is settling on a pretty chaotic six months since Trump's April 2 "Liberation Day" tariff announcement, even though the final duties on goods from China and India, and key imports such as chips and semiconductors, have yet to be agreed. But the parameters are emerging. The average effective tariff rate will probably be somewhere between 15% and 20%, up significantly from 2.5% in December and the highest since the 1930s. The Budget Lab at Yale's latest estimate is 17.4%. |
Up to now, the effective rate has been closer to 10% to 12%, most of which has been swallowed by U.S. firms, who have been reluctant to pass the higher costs to customers. Distortions around the front-loading of imports, and chaos around tariff rates and implementation were so high it made sense to sit tight. |
What could move markets tomorrow? |
- Australia CPI inflation (August)
- Japan PMI (September)
- Taiwan industrial production (August)
- Germany Ifo index (September)
- Bank of England's Megan Greene speaks
- U.S. durable goods (Aug)
- U.S. new home sales (Aug)
- San Francisco Fed President Mary Daly speaks
- U.S. Treasury auctions $70 billion of 5-year notes
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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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