The chief driver of global markets this week has been improving US trade relations, especially with China. However, as we end the week, this is fading. On Thursday, the powerful uptrend in the Nasdaq took a breather, for the first time this week. Nvidia also fell slightly on Thursday, however, the chip maker has surged by nearly 15% in the past 5 trading sessions, so a pullback is to be expected.
US core economic data starts to deteriorate, but it may not last
The lack of more positive tariff news does not mean that stocks can’t rally, instead other factors are coming to the fore for US and global equities. The sharp rise in Treasury yields earlier this week reversed course on Thursday, and bond yields in the US and across Europe were lower, especially at the short end of the curve. This is a result of some weakening core economic data from the US for last month. Core retail sales were moderate, and rose by a mere 0.1% excluding autos, last month. There was also a decline in producer prices, as energy costs fell sharply. The decline in retail sales should not be cause for alarm, especially since tariffs on Chinese imports are now paused. The US consumer is likely to recover and there have been a wave of upgraded growth forecasts for the US economy this year. Polymarket’s probability of a US recession has fallen to 35%, down from 65% a month ago.
Dollar decline continues
Benign inflation and a cooling in the US core economic data has seen a slight increase in expectations for rate cuts from the Federal Reserve for this year, which is weighing on the dollar. The dollar is the weakest performer in the G10 FX space so far this week. The JPY and the CHF have staged a significant recovery this week, USD/JPY is down more than 2%, USD/CHF is down 1.4% and GBP/USD is higher by more than 1%. The JPY is rising even though GDP data was weaker than expected for Q1. However, the GDP deflator was stronger than expected, it rose to 3.3%, up from 2.9% in Q4. The prospect of rising inflation in Japan could push the BOJ into raising interest rates earlier than currently expected, which is also lending the JPY support. Safe haven flows are being replaced by hopes for rate hikes, which may support the yen until we see the US core economic data reverse.
The euro is lagging in the G10 FX space this week, which follows on from the weaker than expected GDP data for Q1. Both Japan and the Eurozone’s economic data was weaker than expected, which highlights the resilience of the UK economy during this period. The UK has secured a trade deal with the US, and it has relative political stability compared to elsewhere, which could trigger further pound outperformance in the short to medium term. EUR/GBP is testing the 100-day sma at £0.8405, a break below this level could trigger a move back towards £0.8350.
US stocks play catch up with European peers
This week we could see US stocks outperform their European counterparts, which may suggest that US equities could play catch up to Europe for the rest of this quarter. The other big mover this week has been commodities. The gold price is a major under performer and is down 3% so far this week. Reduced trade tensions have been a key driver of weaker gold in recent days. However, we would note that gold remains above $3,200, and it managed to hold above the 50-day sma at $3,162, during this week’s sell off, which suggests that residual demand for gold remains.
While Donald Trump’s ill-fated experiment with tariffs is scaled back, risky assets are rallying. However, there are two things to note at the end of this week: 1, the rally in US equities has paused, and S&P 500 futures are down a touch on Friday. Today’s price action could tell us if there is appetite for a move back to the record highs from February. 2, the gold price remains supported for now, which suggests that gold could be an important part of the investment landscape in the current environment. It also suggests that there may be some nervousness about what happens in the summer, when the 90-day US tariff reprieves end.
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