Markets have kicked off the week with US stock futures in the red. This comes after a credit rating downgrade by Moodys late on Friday. But the question many are asking is if the strong bullish momentum in the recent risk rally will continue and take US equities to new all-time highs soon. The huge wave of relief in markets on the US-China tariff truce and climbdown has pushed the benchmark S&P 500 to within 3% of the February record top at 6,147. Its recent outperformance is likely to persist as US companies are the biggest beneficiary of the cuts in levies. There are also arguments that this is a short squeeze – when negative bets bail out and are forced to reverse their positions – which can continue.
However, this astonishing rally does feel very unloved by a lot of Wall Street, with the mood much darker than markets suggest. Current China tariffs are roughly 30%, which is still above where most predicted at the beginning of the year. More broadly, economists reckon the average tariff the US is charging across everything it imports globally is now around 13%. That leaves the world’s biggest economy with the highest trade taxes since the 1940s. They are likely to push US inflation higher and growth lower in time, which leaves many scratching their heads about why stocks aren’t lower.
Data-wise, this week sees China release a batch of figures which could show the impact of the peak escalation of trade tensions. The RBA will cut rates, which is fully priced in by money markets. This would be only the second move in the cycle, a gradual path similar to the BoE. The Board may highlight their fear of easing too much and prematurely, which it thinks could unleash renewed inflation risk. Otherwise, muted growth is expected across most PMI data, with a mild contraction in the UK. These figures have previously remained stronger than feared amid the trade war uncertainty. GBP watchers will also contend with rising inflation data on Wednesday, which historically has printed hotter than expected.