By Jamie McGeever
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Wall Street bucked the positive global equity trend and closed mostly lower on Tuesday, as U.S. service sector data rekindled stagflation fears and shined a light on the difficult position the Federal Reserve may find itself in next month.
More on that below. In my column today I look at the tumult of the last few days that has seen the worlds of U.S. politics, policy, and company earnings collide, exposing the big divergences that run through the country’s equity and bond markets.
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.
1. Trump rules out Bessent for Fed chair 2. Easy to lose, hard to restore: US data trust on the line 3. EU still expects turbulence in trade relations with US 4. Markets struggle to price smoke and mirrors: Mike Dolan 5. Brazil’s economy ready to ride out Trump’s 50% tariff
Today’s Key Market Moves
* FX: Dollar index is flat. The yen is the big mover inG10 FX, slipping around 0.3% vs dollar and euro. * STOCKS: S&P 500, Nasdaq and Dow fall, Russell 2000rises. Benchmark Asian, Chinese, European, emerging indexes allrise. * SHARES/SECTORS: Seven S&P 500 sectors fall, led byutilities -1%; materials index +0.8%. Palantir shares +7.8%. * BONDS: U.S. yields creep higher, up 4 bps at the shortend, flattening the curve. 3-year auction is on the weak side. * COMMODITIES: Oil falls 1.7%, Brent crude futures hit afive-week low of $67.52/bbl. WTI nudges $65/bbl.
Stagflation-ISM
The stagflation red flags raised by U.S. service sector activity figures on Tuesday are a reminder that the world’s largest economy and most important central bank face significant challenges in the months ahead.
Investors took their cue more from the bubbling price pressures in the ISM services report than the signs of softening activity. Treasury yields crept up and rate cut expectations were trimmed as a result.
Still, it’s a curious one. Wall Street’s slump on Friday went hand in glove with plunging yields and a dramatic surge in rate cut bets. Today, a hawkish tilt in the bond and rates futures markets was accompanied by a broad-based equity selloff.
There are other factors at play, not least the barrage of Q2 earnings, tariff headlines, and a renewed spike in policy uncertainty. But these moves are a reminder that there can be good and bad reasons driving yields up or down, and that the correlation with stocks can flip from one day to the next.
The ISM report showed service sector activity in June flatlined while the prices paid index rose to its highest in nearly three years. Tariffs, inflation pressures, growth fears are all in the mix.
Contrast this with China’s services activity data released on Tuesday, which showed the fastest pace of expansion in July in 14 months.
U.S. corporate earnings have generally been strong. Of the 330 companies in the S&P 500 that had reported through last Friday, 80.6% reported consensus-beating profits, compared with the long-term average of 67.1%, according to LSEG data. But Caterpillar warned on Tuesday that tariffs pose significant challenges and could cost the firm up to $1.5 billion this year.
Meanwhile, U.S. President Donald Trump told CNBC on Tuesday that he will not nominate Treasury Secretary Scott Bessent for a position on the Fed’s Board of Governors, thus ruling him out as a candidate for Fed chair. Trump said he will announce Governor Adriana Kugler’s replacement “very shortly.”
Trump also said the U.S. is “very close” to a trade deal with China and that he would meet his Chinese counterpart Xi Jinping before the end of the year if an agreement is struck.
Looking ahead to Wednesday, there are two highlights in the Asian calendar for investors to home in on – the latest Chinese trade figures, and an interest rate decision from the Reserve Bank of India.
The RBI is expected to keep its benchmark repo rate on hold at 5.50%. But in light of the steep tariffs recently imposed on Indian exports by the U.S., traders are putting a near one-in-six chance of a rate cut. Likely RBI intervention on Tuesday kept the rupee from hitting new lows through 88.00 per dollar.
China’s trade figures, meanwhile, will be closely watched after official U.S. data on Tuesday showed America’s trade deficit with its Asian rival shrank in June to its lowest in more than 21 years. In light of the contrasting PMI figures on Tuesday, this will be worth keeping an eye on.
Navigating US markets’ split personalities
During an extraordinary few days when the worlds of U.S. politics, policy, economics and company earnings collided, the divergences that run through the country’s equity and bond markets have come into sharp relief.
For the bond market, the split separates short-dated Treasuries that price off the Fed’s policy rate and longer maturities that are more sensitive to U.S. debt and deficit concerns.
For the benchmark S&P 500, that line is between the ‘Magnificent Seven’, along with a few other tech and artificial intelligence-focused megacaps, and everyone else.
These types of divides have always existed to some extent, but they have become more apparent this year given the historic concentration on Wall Street and rapid deterioration in the U.S. fiscal outlook.
The dramatic moves in U.S. assets over the last few days serve as a microcosm of these deeper divergences.
LONG AND SHORT OF IT
The split in the bond market burst open on Friday.
Triggered by surprisingly weak jobs figures and Trump’s shock decision to fire a senior official in the agency responsible for collecting the data, the two-year Treasury yield plunged 25 basis points and the 2s/30s yield curve steepened by 20 basis points. These were the biggest moves in one year and two and a half years, respectively.
The slump in yields, especially at the short end of the curve, indicates that investors’ supposed concerns about fiscal indiscipline quickly evaporate as soon as growth-sapping cracks in the labor market appear. So much for the bond vigilantes.
Tellingly, there was no pullback on Monday. Indeed, Treasury prices climbed even higher, pushing the two-year yield as low as 3.66%, its nadir since May.
Long-dated yields have declined too, but not as aggressively, resulting in Friday’s dramatic steepening of the 2s/30s curve to levels that, with the exception of April’s brief tariff tantrum, haven’t been seen for more than three years.
Investors may wince at the size of the federal debt and the Treasury’s funding needs but still want to load up on two-year bonds when they think rate cuts are coming. This parallel thinking isn’t new, but the stark difference in the narratives driving the front and back ends of the curve is notable.
STAY NIMBLE
The U.S. equity market concentration story is familiar to everyone by now, but the last few days underscore how jaw-dropping – and seemingly entrenched – it is.
Blockbuster earnings reports from ‘Mag 7’ constituents Meta, Microsoft and Apple juiced another wave of outperformance in Big Tech stocks, reviving debate about concentration risk, bubbles and the long-term benefits of AI.
By some measures, a few Big Tech firms now account for as much as 40% of the total U.S. stock market cap. Tech is more expensive relative to the broader S&P 500 index than ever, even compared to the dotcom bubble, according to Bank of America.
Wall Street’s average valuations and earnings growth are therefore increasingly being driven by Big Tech. Strip out the top 10 firms, and the rump S&P 490 has barely registered any earnings growth in the last three years, according to SocGen’s Andrew Lapthorne.
Again, there are multiple narratives at work here. It may be true that overseas investors want to reduce their U.S. equity exposure, but don’t want to miss out on the Big Tech boom. So even if foreign investors start shedding some U.S. assets – and that’s debatable – they aren’t apt to be jettisoning the likes of Nvidia and Microsoft.
This is a delicate juncture for investors. Wall Street is at record highs, but concentration risk has also rarely been higher. The outlook for long-dated bonds is worrying given current fiscal and inflation dynamics, yet the short end looks much more attractive, though even that is complicated by the economic and unique political pressures bearing down on the Fed.
The divergences in U.S. markets may narrow, gradually or suddenly, or they may continue unabated for some time. Without a crystal ball, it’s tough to know exactly what the catalyst for mean reversion would be.
One thing is likely guaranteed though: in this environment, it will pay to be nimble.
What could move markets tomorrow?
* China trade (July) * India interest rate decision * Taiwan inflation (July) * UK PMI (July) * Germany industrial production (June) * Euro zone retail sales (June) * U.S. Treasury auctions $42 bln of 10-year notes * U.S. earnings including McDonald’s, Disney, Uber, DoorDash * U.S. Fed officials speak: Governor Lisa Cook and BostonFed President Susan Collins at the same event; San Francisco FedPresident Mary Daly
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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.
(By Jamie McGeever; Editing by Bill Berkrot)
