The TPP midweek trading update....

TPP Midweek Trading Update

Equities

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Big Tech has reclaimed its dominant position as investors flock back to the familiar territory of the Magnificent Seven stocks amid mounting tariff concerns. The Nasdaq Composite has returned to positive territory for the year (just), with technology stocks leading the charge. Nvidia has once again become the world's most valuable company for the first time since January, demonstrating the resilience of the artificial intelligence trade despite ongoing U.S.-China tensions.

The underlying strength of the U.S. economy continues to surprise investors who had been anticipating a downturn. Benjamin Melman, chief investment officer at Edmond de Rothschild Asset Management, noted that "everybody was waiting for the US economy to break, but the jobs data from yesterday demonstrates that it's not." He highlighted how investors are employing the "TACO" trade strategy—an acronym for "Trump Always Chickens Out"—as they navigate uncertain tariff policies. This trade idea will get a few laughs and work, right up until the point where it doesn’t. We would be cautious in assuming Trump will always chicken out!

A combination of strong first-quarter earnings and renewed artificial intelligence enthusiasm has driven significant capital flows into equity markets. Nvidia's upbeat outlook has helped solidify its position as a global bellwether for AI trends, contributing to its record market valuation. The Bloomberg Magnificent Seven index has surged 30% since its April low, adding more than $3.5 trillion in market capitalisation.

BUT, let’s not get ahead of ourselves. This resurgence merely means that a number of stocks are now ‘not down’ on the year. They aren’t really up either. The Roundhill Magnificent Seven ETF is still down -3.4% year to date with the 7 having very mixed years so far. Apple is down -16.07%, while Microsoft is up 11.01%. Google is down -11.65% while Meta is up 14.15%. Knowing which one to buy and when, is a very difficult game to play.

Overall, U.S. indices are fairly flat on the year. Here is where they stand as of 16.00 on Wednesday, 4^th June.

The Dow Jones is up 0.51% (of which 0.21% is today). The S&P is up 2.02%, while the small-cap Russell 2000, the best indicator of the US economy at ground level, is down -5.85%.

Meanwhile, European markets have emerged as significant winners this year, benefiting from historic fiscal reforms in Germany and attractive valuations compared to expensive U.S. stocks. Germany's DAX Index continued its outperformance as the country's cabinet prepared to pass a substantial corporate tax package worth an estimated €46 billion ($52 billion). The Stoxx Europe 600 Index has beaten the S&P 500 by a record 18 percentage points this year in dollar terms, though both indices remain more than 2% below their earlier peaks in local currencies.

Dollar Weakness and Bond Market Concern

A notable shift toward dollar weakness has become the defining trend of the summer, with the greenback experiencing its worst start to a year on record. The U.S. dollar index, tracking the currency against six global peers, has declined 8.4% over the first five months of the year and is trading near its lowest levels since spring 2022. More concerning is the breakdown in the traditional correlation between the dollar and bonds, where higher yields typically attract foreign capital.

Markets appear to be pricing in significant risks surrounding U.S. government debt. President Trump's tax legislation is projected to increase budget deficits by $2.7 trillion through 2034. While the administration argues this will be offset by tariff revenues and growth from tax cuts, market scepticism remains high. BlackRock analysts have expressed their "strongest conviction" in being underweight long-term Treasuries, citing potential for the U.S. deficit-to-GDP ratio to reach the higher end of the 5% to 7% range.

The OECD has lowered its U.S. economic growth forecast to 1.6% this year from 2.2% previously, primarily due to tariff impacts. Despite these concerns, the 30-year Treasury yield has retreated from May's 5% highs, though JPMorgan Chase CEO Jamie Dimon's warning of a potential "crack in the bond market" continues to weigh on investor sentiment. The risk extends beyond simple dollar weakness, endangering the U.S. Treasury's status as the world's default risk-free asset could raise borrowing costs globally.

Political Developments and Market Uncertainty

Washington developments continue to influence market sentiment, with White House press secretary Karoline Leavitt addressing several key issues. She confirmed that a highly anticipated call between President Trump and Chinese leader Xi Jinping will occur "very soon," though no specific date was provided. Both nations have accused each other of violating the Geneva agreement that temporarily eased trade tensions.

The administration has requested that countries submit their best trade offers by Wednesday to accelerate negotiations. Leavitt also defended Trump's tax bill against criticism from Elon Musk, who called the legislation a "disgusting abomination" due to its projected $3.8 trillion addition to the deficit over a decade. Despite Musk's critique, Leavitt stated that the president remains committed to what he calls "one big beautiful bill."

The current market environment has left many investors struggling to position themselves effectively. Roland Kaloyan, head of equity strategy at Societe Generale, observed that "there are a lot of investors who are themselves puzzled by these indexes bouncing back to their historic highs. It's really getting complicated for investors to position themselves given the lack of visibility, the uncertainty with markets fully valued."

Commodity Markets

Central bank gold purchases have shown signs of moderation, with net additions of 12 tonnes in April representing a 12% decrease from the previous month and falling below the 12-month average of 28 tonnes. While central banks continue accumulating gold reserves, the pace has slowed as prices reach record highs, marking the second consecutive month of reduced accumulation.

Oil markets have seen renewed strength, with ICE Brent reaching its highest levels since mid-May, trading just below $66 per barrel. Wildfires in Alberta, Canada, provided upward price pressure as markets digest OPEC+'s announced July supply increase. Clear signs of tightness in spot oil markets are emerging as the Northern Hemisphere summer approaches, with both Brent and WTI prompt time spreads strengthening and trading in deep backwardation.

As hurricane season begins, the combination of political uncertainty, bond market stress, and evolving global trade dynamics suggests a potentially volatile summer ahead for financial markets.

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Disclaimer: The views expressed in this article are the author’s own and should not be considered in rendering any legal, business or financial advice. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only.

Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to the corresponding past performance.

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