Friday’s sharp bounce on Wall Street flattered a rough week, but stock futures were back in the red again early today as investors continue to fret about the impact of all the economic policy upheaval on American households.
I’ll review what’s moving global markets this morning and then explore how the Trump administration’s potential plan to weaken the dollar could take Wall Street down with it.
Monday’s U.S. retail sales update for last month will be in sharp focus today, despite consensus forecasts for a brisk rebound in shopping after a weather-related drop in January.
Once that’s out, the Atlanta Federal Reserve will update its closely-watched ‘GDPNow’ model, where the current estimate is for an alarming first-quarter economic contraction of 2.4%.
Meanwhile, Donald Trump’s new administration appears to have no intention of slowing the pace of policy disruption, but is instead telling Americans to brace themselves for a bumpy ride.
Treasury Secretary Scott Bessent on Sunday again refused to rule out a recession, adding that stock market corrections like the one the S&P 500 recorded last week were “healthy”.
“We are going to have a transition, and we are not going to have a crisis,” Bessent told NBC’s “Meet the Press”.
Otherwise, it’s a big week for central banks, with the Fed, Bank of Japan and Bank of England all meeting, However, no major policy moves are expected by any of them.
The Fed is highly unlikely to change interest rates given all the shifting policy sands. But investors will scrutinize the updated economic and policy rate projections and try to assess whether there could be a pause in the rundown of the Fed’s balance sheet.
Fed policymakers currently expect two rate cuts this year, with futures markets half priced for a third. Ten-year Treasury yields were firmer to start the week, and the dollar was steady.
Overseas, stocks in Europe and Asia were mostly up on the day.
The latest sweep of Chinese economic updates showed that retail and industry numbers for the first two months of the year were above forecasts, but ongoing deflation in home prices continues. Beijing’s latest consumption stimulus plan was also in focus, but mainland Chinese shares bucked the regional trend and ended the day lower.
In Germany, last week saw an agreement among the mainstream political parties to push ahead with the massive fiscal stimulus and defence reboot. Now attention will turn to the actual vote on Tuesday. Although court challenges to the plans are underway, the vote is expected to pass.
Now, I’d like to explore how all of the volatility on Wall Street in recent weeks may be related to the Trump administration’s plans for the dollar.
Dollar stops insulating U.S. stocks
Seemingly erratic U.S. policymaking may be weakening the dollar as much as any potential ‘Mar-a-Lago accord’ could have hoped, but risks taking U.S. asset prices down with it.
As U.S. trade and political alliances are sundered and Americans start to fret about an economic downturn, foreign investors in the United States are having to rethink some basic assumptions.
Deutsche Bank strategist George Saravelos points out that in early 2025, overseas investors, who have for years been happy to hold U.S. dollar assets without hedging the currency, have had a rude awakening.
Even though first-quarter losses for S&P 500 stocks are about 6% in dollar terms, unhedged European investors have suffered almost twice that - as the euro has surged 5% against the dollar amid a defense-related reboot of German and euro fiscal policy.
Similarly, year-to-date losses of less than 1% in popular exchange-traded funds in U.S. Treasuries are magnified to more than 5% for euro-based investors.
What’s more, unhedged U.S. equity losses for European investors are now on par with the quarterly hit taken after Russia’s Ukraine invasion in 2022 and other inflationary forces sparked bruising U.S. interest rate rises.
And, outside the pandemic, these hits haven’t been matched since the quarterly loss recorded when Donald Trump’s first trade war with China unfolded in 2018. Beyond that, you have to go all the way back to the banking collapse of 2008 for a worst three months for unhedged European investors.
Comments