Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

The dollar slid and stocks surged on Thursday as investors ramped up bets that U.S. interest rates will soon be cut, after President Donald Trump, in his latest attack on Fed Chair Jerome Powell, reportedly said he may name his replacement early. 

In my column today I look at where the 'pain trades' for investors may lie in the second half of the year. More on that below, but first, a roundup of the main market moves.

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Juice the economy. That seems to be the Trump administration's broad plan, which will be achieved in time by tax cuts, deregulation, and loose fiscal policy. And loose monetary policy. Most definitely loose monetary policy. 

Pressure from the White House on the Fed to cut interest rates is nothing new. The president has unleashed several verbal tirades towards Chair Jerome Powell for not doing so, branding him "very stupid", "very dumb" and of "low IQ".

Powell's term as Chair expires in May next year, and he insists he can't be fired. So Trump is now considering naming his replacement early, who could operate as a 'shadow' Fed chair, undermining Powell's influence. 

It remains to be seen how effective or even viable this would be. But the fact it's being floated is pouring fuel on market moves that were already beginning to catch fire - the dollar is tumbling, Fed rate cut bets are being ramped up, stocks are flying, and 'Big Tech' is getting its mojo back. 

The dollar on Thursday slumped to its lowest in more than three years against a basket of major currencies - performing especially poorly against European currencies - and is on track for its worst first half of any year in over half a century. 

The Trump administration will likely be quite happy with the way markets are reacting - a more export-competitive dollar, lower short-term yields, and higher stocks. And if you look further out, higher nominal growth and above-target inflation to inflate away the debt.

The danger is these moves snowball and the dollar goes into a more rapid freefall, triggering widespread market dislocation. But we're not there yet, and investors are running with it.

As the first half of the year closes, financial markets are in limbo, waiting to see how the kaleidoscope of global trade deals will – or won't – come together after July 9, when Washington's pause on its "reciprocal tariffs" expires. But if investors are wrong-footed, which trades will be the most vulnerable?

The state of suspended animation in today's markets is remarkably bullish. U.S. growth forecasts are rising, S&P 500 earnings growth estimates for next year are running at a punchy 14%, corporate deal-making is picking up, and world stocks are at record highs. 

The uncertainty immediately following President Donald Trump's April 2 "Liberation Day" tariffs seems a distant memory.  The relief rally has ripped for nearly three months, only taking a brief pause during the 12-day war between Israel and Iran. 

It's a pretty rosy outlook, some might say too rosy. If we do see a pullback, what will be the biggest "pain trades"?

The major pressure points are, unsurprisingly, in asset classes and markets where positioning and sentiment are most overloaded in one direction. As always with crowded trades, a sudden price reversal can push too many investors to the exit door at once, meaning not all will get out in time.

To identify the most overloaded positions, it's useful to look at the Bank of America's monthly global fund manager survey. In the June survey, the top three most-crowded trades right now are long gold (according to 41% of those polled), long "Magnificent Seven" tech stocks (23%), and short U.S. dollar (20%).

This popularity, of course, means these three trades have been highly profitable. 

The "Mag 7" basket of Nvidia, Microsoft, Meta, Apple, Amazon, Alphabet and Tesla shares accounted for well over half of the S&P 500's 58% two-year return in 2023 and 2024. The Roundhill equal-weighted "Mag 7" ETF is up 40% this year, and the Nasdaq 100 index, in which these seven stocks' make up more than half of the market cap, this week hit a record high. 

Meanwhile, the gold price has virtually doubled in the last two-and-a-half years, smashing its way to a record high $3,500 an ounce in April. And the dollar is down 10% this year, on track for its worst first half of any year since the era of free-floating exchange rates was established more than 50 years ago.