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Trading Day: Resilience trumps uncertainty

12 hours ago

By Jamie McGeever

ORLANDO, Florida (Reuters) – TRADING DAY

Choppier waters ahead?

One of the biggest surprises in a week overflowing with them – from top-tier economic indicators, to company earnings and policy decisions from around the world – was how steadfast financial markets were.

Global and U.S. stocks closed the week with gains of up to 3%, the dollar advanced, Treasury yields rose, and the VIX index of U.S. equity market volatility eased. On the surface, a strong week for investor sentiment and risk sentiment.

But that would be only half the story.

Figures showed that the U.S. economy shrank in the first quarter – a statistical anomaly due to a record hit from trade, perhaps, but the first contraction in three years, nevertheless, and putting the economy halfway towards a technical recession.

Some of that gloom was countered by unequivocally positive GDP figures from the euro zone. And yields and stocks leaped higher on Friday after April’s non-farm payrolls report showed the Trump administration’s global trade war has yet to be materially felt in the U.S. labor market.

On the corporate front, dozens of leading global firms cut or declined to give forecasts in their first-quarter earnings, such is the uncertainty surrounding tariffs. Yet the overall tone from these calls this week was positive, and investors have consistently bought the post-Liberation Day dip.

One of the most significant developments this week for world markets came from Tokyo, where the Bank of Japan kept interest rates on hold as expected but slashed its growth outlook and lowered its inflation forecasts. The yen tumbled, but still ended the week essentially flat.

So, some huge price swings in individual shares and assets. In the U.S. and beyond, there’s little evidence that trade uncertainty is prompting companies to lay off workers or jack up prices. Not yet anyway.

There’s a growing belief that U.S. President Donald Trump is backing away from his more belligerent tariff threats, and that a more receptive Washington is closing in on several bilateral trade deals. Tensions with China may even be cooling too.

However, the risks to growth and markets lie ahead, and a “cliff-edge type of adjustment” in the coming months is possible, warns RBC BlueBay Asset Management’s Mark Dowding.

“There appear to be similarities to the Roadrunner cartoon, in which Wile E. Coyote keeps on running, long after the ground has disappeared beneath his feet, ahead of the inevitable moment of realisation when gravity kicks in,” he wrote on Friday.