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Home Technology & Startups

Morning Bid: Policy fog sidelines Fed

March 19, 2025
in Technology & Startups
Reading Time: 8 mins read
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By Mike Dolan

LONDON (Reuters) – What matters in U.S. and global markets today

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

Like most of its central banking peers, the Federal Reserve will likely sit on its hands at this week’s meeting, blinded by the multiple crosswinds from U.S. economic policy upheaval and plans for sweeping tariff hikes.

Despite all the policy fog and market shifts, though, one thing hasn’t changed over the past month: investors still think the big tech trade is too crowded. I’ll discuss this and the rest of today’s market news below.

Today’s Market Minute

* Several U.S. national security agencies have suspended certain efforts to counter Russian sabotage, disinformation and cyberattacks, potentially lifting some pressure off Moscow, according to Reuters exclusive reporting.

* A U.S. federal judge has blocked billionaire Elon Musk and DOGE from taking any more steps to shut down the U.S. Agency for International Development, saying their efforts to close the foreign aid agency were likely unconstitutional.

* Tumbling stock markets and signs of tightening credit may make the Federal Reserve’s job even more difficult as policymakers zero in on consumer spending.

* Russian President Vladimir Putin has agreed to a temporary halt to attacks on Ukrainian energy facilities, but stopped short of backing a 30-day ceasefire following a phone call with Donald Trump.

* The Bank of Japan has kept interest rates steady, as its policymakers buy themselves time to figure out how the prospect of higher U.S. tariffs might affect their country’s export-focused economy.

Policy fog forces Fed to the sidelines

Wall Street stocks had another bruising day on Tuesday, led by further sharp losses for the Big Tech megacaps. This contrasted with the strong gains in Europe and Hong Kong, as global investors continue to frantically rotate their equity portfolios.

Germany’s defence push and gigantic fiscal stimulus got the green light from the Bundestag on Tuesday and is set to pass the upper house of parliament by the weekend.

But most markets around the world stalled out on Wednesday, likely because investors are waiting to hear if central banks can see anything through the fog.

While Fed watchers expect no policy change from Chair Jerome Powell and team later on Wednesday, all eyes will be on the updated quarterly economic and rate projections.

Right now, futures have little more than two Fed rate cuts priced by yearend – essentially what the Fed had indicated three months ago – and the next move is not expected until June or July.

Investors will also keep close tabs on Fed statements about the ongoing balance sheet rundown, which it may pause temporarily amid the debt ceiling wrangling in Congress.

Ahead of the Fed decision, U.S. stock futures, Treasury yields and the dollar all steadied.

Worries about an economic downturn were partially calmed by the release of positive U.S. industry and housing starts numbers for February on Tuesday that contrasted with more worrying business survey data. Ebbing oil prices, now tracking 20% year-on-year losses, also helped soothe nervy investors.

Japan’s yen slipped as the Bank of Japan held the line on its policy ‘normalisation’, putting off another rise in its key rate, citing uncertainties around a potential looming global trade war.

Tuesday’s much-vaunted phone call between President Donald Trump and his Russian counterpart Vladimir Putin on Ukraine disappointed, with Putin only offering a partial ceasefire around Ukrainian energy infrastructure.

Elsewhere, Turkey’s currency, stocks and bonds tumbled after authorities detained President Tayyip Erdogan’s main political rival on charges including corruption and aiding a terrorist group, in what the opposition called “a coup attempt.”

Meanwhile, Gold prices continued to climb.

And now onto today’s deep dive about the crowded trade that is still keeping investors up at night.

U.S. big tech still too crowded

Stock corrections are often just reality checks that ultimately allow bull markets to live on as investors “buy the dip”, but this time around, global asset managers seem wary of jumping back into Wall Street’s Big Tech behemoths.

Investors’ heads may be spinning after a turbulent month of tariff angst, U.S. recession fears, a 10% recoil in the S&P 500 and Europe’s fiscal reboot. The scale of the portfolio upheaval was captured on Tuesday by Bank of America’s monthly fund manager survey.

The closely-watched poll of global asset managers showed the biggest one-month reduction in U.S. equity exposure in the 25-year history of the survey – a whopping 40 percentage point drop, leaving a net 23% of respondents now underweight.

And if you’re wondering where that money’s gone, look across the pond. Allocations to euro zone stocks jumped 27 points, with 39% now overweight – the highest in four years.

So far, so Transatlantic.

But for those who think U.S. downturn jitters are overblown, or that the hand-wringing in business and consumer surveys is not matched by hard factory or retail data, this may seem like a good moment to load back up.

However, the March survey offered a lot more to chew on, highlighting a smorgasbord of other concerns about erratic U.S. trade and economic policies, global growth risks, stagflation fears and a persistent aversion to bonds given interest rate and debt worries.

And most alarmingly for stock market optimists, investors still think the so-called “Magnificent Seven” U.S. mega caps are over-owned – even after one of their worst four-week periods with a near 20% plunge in the collective valuation of Apple, Nvidia, Microsoft, Amazon, Meta and Tesla.

For the 24th straight month, asset managers identified “Long Big Tech” as the most crowded trade on the planet.

CROWDED HOUSE

An easy retort is that being repeatedly identified as the “most crowded trade” over the past two years didn’t stop a near doubling of the overall “Mag 7” price in that period.

And even if forward price/earnings valuations for the tech-heavy Nasdaq composite remain historically frothy, they are their lowest in five years relative to the overall S&P 500.

And yet there’s a tipping point for everything, and there are two key reasons why Big Tech may still reasonably be considered too crowded.

The first is that U.S. economic disruption is forcing unprecedented stimulus in Europe and China, where stock market valuations are far cheaper than on Wall Street. For many, the global “value trade” may simply be too tempting to ignore.

Europe’s STOXX 600 is still trading at a whopping 36% discount to the S&P 500, even after the recent rotation, and its forward PE remains almost 50% cheaper than the Nasdaq 100’s.

And even though China’s DeepSeek development this year has electrified Hong Kong stocks, they are still some 55% cheaper than the S&P 500.

The second reason Big Tech may be primed to fall further is what’s happening over at the Federal Reserve. Big Tech stocks have historically been insulated from recession fears due to their interest rate sensitivity. They are “long duration” equities, meaning their valuations benefit disproportionately from falling equity discount rates.

But the tariff threats driving the downturn fear this time around could aggravate already hot inflation as much as growth. In turn, the Fed’s hands may be tied more so now than in the past, thereby eliminating one of the tech sector’s potential recession buffers.

What’s not in doubt is how much these mega caps flattered the bull market due to the sheer size of their index weightings. Mag 7 stocks collectively still represent almost 30% of the S&P 500’s market cap. So a drag on tech now risks being an equally large drag on the whole complex.

Global asset mangers have voted with their feet already – and may reasonably see the U.S. picture as too messy for the foreseeable future.

Chart of the day

U.S. President Donald Trump still intends for new reciprocal tariff rates to take effect on April 2, the White House said on Tuesday, despite earlier comments from Treasury Secretary Scott Bessent that indicated a possible delay in their activation. U.S. Trade Representative Jamieson Greer and his staff have been wrestling with how to design the reciprocal tariffs given that each of the 186 members of the World Customs Organization has different duty rates.

Today’s events to watch

* U.S. Federal Reserve’s Federal Open Market Committee’s policy decision, statement and updated quarterly economic projections, with press conference from Fed Chair Jerome Powell

* U.S. January TIC data on foreign holdings of Treasury securities

* European Central Bank Vice President Luis de Guindos speaks in Madrid

* U.S. corporate earnings: General Mills, Progressive

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Mike Dolan; Editing by Anna Szymanski)

Tags: Bank of JapanBig TechDonald TrumpFed rate cutsFederal Reserveglobal investorsglobal marketsVladimir Putin
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