US stock index futures drifted lower in early trade this morning, but the losses were modest. This followed a strong session on Wednesday which saw the NASDAQ 100 close at a new all-time high, while the S&P 500 hovered below its own record high from this time last week.
Source: TN Trader
These gains were thanks in large part to a 2% gain in NVIDIA which became the first corporation in history to achieve a $4 trillion market valuation. The Dow ended within touching distance of its own record close while the mid-cap, domestically-focused Russell 2000 was still around 9% below highs hit in November last year.
Stock market investors were unfazed by President Trump’s announcement yesterday of a 50% tariff on Brazil, set to come in on 1st August. Mr Trump expressed his displeasure with the “very unfair trade relationship” with Brazil, along with his objection to the ongoing trial of former Brazilian President Jair Bolsonaro who is accused of illegally interfering during the country’s last election in 2022.
The current Brazilian President, Luiz Inacio Lula da Silva, said the country would respond in kind. While US stock markets seemed unaffected by the news, Brazilian equities took a hit as did the currency which fell to a one month low against the US dollar.
President Trump had already announced a 50% levy on US copper imports, and said that his administration was also looking at imports of pharmaceuticals and semiconductors. Mr Trump said that pharmaceuticals could be subject to a 200% tariff, although that would not be for this year, and was likely to come in in eighteen months’ time.
As far as the tariff on copper is concerned, which is now in line with steel and aluminium imports, and also pencilled in for 1st August, it is unclear what the benefits to the US will be. Unlike some manufacturers, for instance Apple or car makers, who could build production facilities in the US, it’s not possible to relocate a copper mine from, say, Chile to Texas.
Instead, the extra cost, which is significant, is likely to be paid by the US importer and end user. Given that copper is so widely used, in cabling, house building, data centres, you name it, a 50% tariff on copper imports doesn’t sound like good business. But it doesn’t really matter, because no one believes that when push comes to shove, President Trump will follow through on it.
Instead, the market believes there will be carve-ups, exemptions and extensions, as has been the case this year and in Mr Trump’s previous presidential term. Consequently, market participants have concluded that they can go on increasing their exposure to risk assets. And why not?
While there is undoubtedly complacency in the market, and valuations at the top are historically stretched, there are no obvious signs of distress generally. The S&P 500 has joined the NASDAQ at all-time highs. NVIDIA has become the first corporation in history with a $4 trillion valuation, AI is set to boost productivity, the VIX is indicating that investors see little need to take out insurance against a significant downward move, while US Treasury yields continue to trade within perfectly reasonable ranges.
Last night’s release of minutes from the FOMC’s June meeting offered up little that the market hadn’t already worked out by itself. Tariffs were mentioned, but the committee felt that any inflationary effects were likely to be "temporary or modest".
Most FOMC members thought that rate cuts should come later this year. The CME’s FedWatch Tool suggests that there will be a 25 basis point cut in September, followed by another in December. This is in line with the FOMC’s own forecast in last months’ quarterly Summary of Economic Projections.
So, with April’s tariff panic firmly in the rearview mirror, and the prospect of looser monetary policy ahead, investors seem in no mood to dial back on their stock market exposure.
