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
World markets and the U.S. dollar have surged this morning after a shock U.S. court ruling overnight that said the bulk of President Donald Trump’s sweeping import tariff hikes were outside his authority.
I’ll discuss the implications of this below along with the rest of the morning’s market news before getting into today’s deep dive, where I explain why Germany may not remain long in its new role as the world’s top creditor.
Today’s Market Minute
* A U.S. trade court blocked most of President Donald Trump’s tariffs in a sweeping ruling on Wednesday that found the president overstepped his authority by imposing across-the-board duties on imports from U.S. trading partners.
* Billionaire Tesla CEO Elon Musk is leaving the Trump administration after leading a tumultuous efficiency drive, during which he upended several federal agencies but ultimately failed to deliver the generational savings he had sought.
* NATO will ask Germany to provide seven more brigades, or some 40,000 troops, for the alliance’s defence under new targets for weapons and troop numbers that its members’ defence ministers are set to agree on next week.
* In the faceoff between heavily indebted developed economies and increasingly wary investors, Japan has blinked first, announcing that it will reconsider its debt profile strategy. The U.S. could soon follow. Read the latest from Reuters columnist Jamie McGeever.
* The U.S. power system is on track to produce more electricity from clean power sources than from fossil fuels for the third straight month in May, a record-long stretch. Find out more in the latest piece from Reuters columnist Gavin Maguire.
Trump tariffs thwarted
The Manhattan-based Court of International Trade ruled on Wednesday that the U.S. Constitution gives Congress exclusive authority to regulate commerce with other countries, and that this authority is not overridden by the president’s emergency powers.
In response, the White House quickly set an appeal process in motion, one that could go all the way to the Supreme Court.
But the trade court has, at least temporarily, invalidated all of Trump’s orders on tariffs since January that were rooted in the International Emergency Economic Powers Act, a law meant to address “unusual and extraordinary” threats during a crisis.
While the ruling doesn’t cover sector-specific tariffs on steel or autos, analysts said it does invalidate the 10% universal tariff, the global ‘reciprocal’ tariffs, levies on Canada and Mexico and the new China levies.
At the very least, the tariffs are in limbo for now.
Appeals are pending and there may be other legal routes to reinstate the levies, but, as it stands, the ruling effectively freezes bilateral trade negotiations with Europe, China and other countries that needed to be concluded by July 9.
Stock markets – which were already cheering a decent set of Nvidia results that came out shortly before the court announcement – zoomed higher ahead of today’s bell on the prospect of frustration, delay and possible suspension of the central plank of Trump’s trade war.
U.S. futures jumped between 1.5% and 2% ahead of Thursday’s bell. Bourses in Europe and Asia rose too, with Japan’s Nikkei leading the way with gains of almost 2%.
The S&P 500 is currently about 4% below an all-time high touched on February 19, having rebounded from a near 20% decline last month.
For individual stocks, Apple climbed 3.6% overnight, while Meta and Alphabet added more than 2%.
Shares of Nvidia were up more than 5% as the chip giant beat estimates again for first-quarter sales, driven by customers stockpiling AI chips ahead of restrictions on U.S. exports to China. Markets seemed relaxed even as the company warned that the new curbs were expected to cut $8 billion from current-quarter sales.
The Nvidia gains appeared to hold even after news emerged that Washington had ordered a broad swathe of companies to stop shipping goods to China without a license and revoked licenses already granted to certain suppliers.
Products affected include design software and chemicals for semiconductors, butane and ethane, machine tools, and aviation equipment, Reuters sources said.
But the tariff ruling has since dominated headlines.
The dollar, which had fallen as the tariffs were rolled out over the past few months, initially climbed, hitting its best levels in a week. But it gave back much of these gains as the New York open neared.
Crude oil prices pushed higher and gold fell.
In the midst of a heavy week of new debt sales, U.S. Treasury yields nudged higher and the yield on long-bonds held above 5%.
Federal Reserve futures are now pricing in less than two rate cuts through the end of the year, with barely 40 basis points of easing now expected before December.
Minutes from the U.S. Fed’s latest policy meeting released on Wednesday indicated that policymakers felt they could face “difficult tradeoffs” in coming months in the form of rising inflation alongside rising unemployment.
A second estimate for first-quarter GDP is due out later, and the latest update on the Fed’s favoured inflation gauge is slated for Friday. Big retailers top the earnings calendar on Thursday.
And now onto today’s column, where I explain how Germany’s re-emergence as the world’s top creditor may affect international capital flows in a time of international economic upheaval.
Germany’s return as world’s top creditor may be fleeting
Germany is reprising its role as the world’s biggest creditor for the first time since 1991 – but seismic global policy changes suggest it might not be back in the seat for long.
As the United States has soaked up the vast bulk of global savings over the past two decades, the stability of ballooning global trade and investment imbalances has become one of the biggest market issues – especially now, as trade wars unfold.
For everyone plotting the map, Japan’s Ministry of Finance this week recorded a remarkable milestone.
For the first time in 34 years, Germany overtook Japan last year as the biggest net provider of investment capital to the rest of the globe.
While exchange rates had something to do with the ranking switch, Germany’s unenviable top spot – borne of weak growth and a lack of investment opportunities at home – speaks volumes about the state of world savings, investment and demographics.
The three top net creditors – Germany, Japan and China – have one major thing in common. They are all large aging economies where populations have already peaked and are set to decline over the remainder of the century – dampening domestic demand in the process and generating outsized savings pools.
But, as Deutsche Bank Chief Economist Robin Winkler points out, the German and Japanese investment positions are quite different in nature.
Much to the chagrin of U.S. President Donald Trump’s new administration, both countries have run chronic trade surpluses with the United States and the rest of the world for years, relying on exports for growth amid depressed local demand.
And they have both banked the lion’s share of the resulting savings into overseas investments, mostly in the faster-growing America.
In the process, these flows generated more than a decade of U.S. asset booms and dollar appreciation – something Trump’s team claim had clobbered U.S. manufacturing competitiveness and eliminated good-paying jobs in the process. Trade tariffs will help to redress the imbalance, according to Trump, and so too would a weaker dollar.
FICKLE OR STICKY?
But Winkler points out that much of the rise in Japan’s surpluses over the years has been in direct investments – company acquisitions, new overseas plants and job creation.
Unlike Japan, Germany’s trade surpluses have been mostly recycled into portfolio investments such as stocks and bonds – making them far less “sticky” and easily reversed.
For Germany, this could be a double-edged sword.
“It makes Germany more susceptible to criticism that its trade surpluses vis-Ã -vis certain countries have not directly generated jobs in these countries,” Winkler wrote, adding this could be a problem in trade talks under way.
“On the other hand, the low share of direct investment makes Germany’s net asset position more liquid and fungible than Japan’s,” he added. “This should be an advantage at a time of geopolitical fragmentation as it is easier to reallocate or even repatriate foreign assets quickly should it become necessary.”
Of course, the flipside of Trump’s trade and diplomatic wars in Europe this year has been a transformative fiscal boost in Germany aimed at both re-arming and rebuilding the economy – changing its domestic growth trajectory as well as potential choice of investment destination for its savers.
Capital needs in Europe are rising fast and incentives for savers and investors to stay at home will come with that.
This creates substantial risks for Wall Street – and not just dollar depreciation, which the administration appears to be encouraging.
While Japanese investors make up the single biggest group of overseas investors in U.S. government bonds, Europe was the source of $7 trillion of overseas equity investment since 2012.
As the past week revealed, the stakes in U.S.-European trade talks – which now only have six weeks to square numerous thorny issues – are very high on both sides of the Atlantic.
Chart of the day
Global economic surprise indexes that measure incoming economic data against consensus forecasts are at their highest levels in a year. And after three months in negative territory, the U.S. surprise index is back in positive territory too, reaching its best level since February. Of course, much of the data being released covers the period before U.S. tariffs came into effect, meaning they may be flattered by front-loading to beat the tariffs. But these figures are another sign that ‘hard’ data is continuing to hold up. But now that the whole trade outlook has been upended once again, the picture may get even foggier.
Today’s events to watch
* U.S. first quarter GDP revision and Q1 corporate profits (8:30 AM EDT), weekly jobless claims (8:30 AM EDT), April pending home sales (10:00 AM EDT); Canada Q1 current account (8:30 AM EDT)
* Federal Reserve Board Governor Adriana Kugler, San Francisco Fed President Mary Daly, Dallas Fed President Lorie Logan, Chicago Fed chief Austan Goolsbee and Richmond Fed boss Thomas Barkin all speak. Bank of England governor Andrew Bailey speaks
* U.S Treasury sells $44 billion of 7-year notes
* U.S. corporate earnings: Costco, Best Buy, Hormel Foods, Dell, NetApp, Cooper, Ulta Beauty
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)
