Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Wall Street slumped on Tuesday, dragged down by weakness in some of the big tech companies that have led the charge to new highs this year, as investors hunker down ahead of a keynote speech by Fed Chair Jerome Powell later this week. 

More on that below. In my column today I look at the cagey dance between Donald Trump and Wall Street - the market knows it has the power to rein in some of the president's policy excesses, but isn't wielding it. Not yet, anyway. 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Peace in our time? Investors digested the extraordinary summit between U.S. President Donald Trump, Ukraine President Volodymyr Zelenskiy and a phalanx of European leaders in the White House on Monday. Did it move the dial much on the prospects of a Russia-Ukraine ceasefire, or a deal to end the war? 

Optimism around Trump's promise of security guarantees for Ukraine in the future buoyed European markets on Tuesday. But that evaporated as the U.S. session rolled on, as Trump told Fox News he thinks Russian President Vladimir Putin may not want to make a deal after all.

There may be no immediate direct impact on major equity, bond or currency markets from the conflict. But prolonged war on Europe's doorstep, fractured ties between the US and Europe, and a fickle relationship between Trump and Putin can't be good in the long term.

* Retail therapy. Some of America's biggest retailers report second quarter earnings this week, shining a light on the health of the U.S. consumer and, by extension, the economy at large. Home Depot reported on Tuesday; Lowe's, Target and TJX release results on Wednesday; and Walmart is out on Thursday. 

There are conflicting signals coming from the U.S. consumer. By some measures, household consumption flat-lined in the first half of the year, but other indicators show consumer spending is the biggest contributor to GDP growth. The rich are spending, but the bottom 50% is struggling.  

The S&P 500's consumer discretionary sector is flat this year and the consumer staples index is up 6%. Both are lagging the broader index, which is up 8%, and the IT and communications sectors, which are both up around 13%.

* Interest rate decisions. The central banks of New Zealand, Indonesia and China announce their latest policy decisions on Wednesday. Two of the three are expected to stand pat, and one is expected to cut borrowing costs. 

The People's Bank of China is is expected to keep benchmark one- and five-year lending rates unchanged for the third straight month at 3.5% and 5.5%, respectively. Although the economy needs more support, the central bank may want to explore structural policies aimed at specific sectors rather than broad-based monetary easing. For now.

This has helped propel a recovery in the yuan, which was plumbing 17-year lows at the depths of the 'Liberation Day' tariff turmoil in April. Since then, the PBOC has only lowered borrowing costs once, by 10 basis points, and has fixed the yuan higher in 16 of the last 19 weeks. 

U.S. President Donald Trump has faced little opposition in his drive to rip up the global economic rule book, whether from his fellow Republicans, political opponents or institutional guard rails. The only exception has been "the market". 

But now even investors are holding their fire, enabling more risk to build up in the financial system. 

Wall Street's reaction to Trump's "Liberation Day" tariffs on April 2 was so ferocious that the president did something he had rarely done: he backed down.

Trillions of dollars were wiped off the value of U.S. stocks amid a 10% nosedive from April 3-4. The only two-day selloffs since the 1930s that were bigger occurred during the Second World War, "Black Monday" in 1987, the Global Financial Crisis in 2008, and the pandemic in 2020. 

The stock market bottomed out on April 7 after Trump paused most of his country-specific tariffs. Wall Street has not looked back since, with the S&P 500 rebounding 35% to a new all-time high.  

This episode suggests that "the market" is one of the few true checks on Trump's apparent pursuit to re-shape the U.S. – and indeed the world – economy. 

 The only problem is that the president has continued to pursue unorthodox policies in recent months - including challenging the independence of the Federal Reserve, firing statisticians and slapping tariffs on countries for non-economic reasons – and investors have failed to tap the brakes.