Not a bubble until it bursts

Major global indices climbed yesterday — many to fresh all-time highs — on news that the US and China are inching closer to a trade deal that would prevent the two countries from imposing triple-digit tariffs on their mutual exports. Today, that optimism continues: talks between President Trump and Japan’s new Prime Minister, Sanae Takaichi, reportedly went very well, leading to an agreement on critical minerals trade. Trump praised Japan, calling this the “new golden age” for the US-Japan alliance. It could hardly have gone better.

On the Chinese front, investors are now bracing for a positive outcome as well. Yet fundamentally, the US and Chinese objectives remain difficult to align. The US wants to bring manufacturing back home — which comes at China’s expense — while also encouraging Beijing to spend more domestically, something Xi has tried and largely failed to achieve. As two Bloomberg journalists aptly wrote this morning, China’s latest five-year plan “appears to show Trump’s rebalancing dream to be — as far as Beijing is concerned — a fantasy.”

Still, personal rapport between the two leaders could help keep relations as stable as possible under the circumstances. But any trade deal is unlikely to mark an endgame or magically eliminate policy volatility under Trump. Fortunately, markets have acclimated to that since January. The S&P 500 hasn’t waited for perfect news to extend its rally to new highs — it’s been doing so since June — while Chinese and Hong Kong equities are clawing back past losses, led by tech names.

In Japan, the Nikkei on Monday crossed the 50’000 level for the first time in history, though we’re seeing some profit-taking this morning. But overall, the news flow remains supportive of risk-taking: trade deals with the US are lining up, the Federal Reserve (Fed) and the Bank of Canada (BoC) are both expected to cut rates this week, and the Bank of Japan (BoJ) outlook has turned softer under Takaichi.

What could go wrong? Time will tell — but for now, equity investors around the world are enjoying the rally, while safe-haven assets pull back. Gold, for instance, slipped below $4,000 per ounce, in what looks like a healthy correction after its exponential rally. The pullback could deepen by 10–20%, bringing prices back toward $3,400, the key 38.2% Fibonacci retracement of the past two-year surge. Above $3,400, gold’s uptrend remains intact, and bulls still have their eyes on $5,000.

Elsewhere in commodities, copper remains volatile but broadly positive, while US crude tested — but failed to clear — its 50-day moving average yesterday despite the trade optimism. Tactical bullish bets placed after last week’s sanctions against Rosneft and Lukoil are now being closed. There’s speculation the sanctions may prove less severe than initially feared, as Trump likely wants to avoid triggering a price spike. Add to that Saudi Arabia’s efforts to expand market share and expectations that OPEC will bring additional barrels to market, and the bears are likely to push for a return below $60 per barrel.

In FX, the US dollar retreated to a one-week low as the Fed began its two-day policy meeting. The central bank is widely expected to deliver a second 25-bp cut this year, amid growing speculation it may also announce an end to quantitative tightening (QT). Some suggest QT could end immediately, arguing that post-pandemic excess liquidity has now been fully absorbed and that the Fed wants to avoid draining it further. If that’s the case — if this week’s much-expected, fully priced-in rate cut is sweetened by the end of QT — equity bulls will have little reason to reverse the current rally. Short-term yields and the dollar would likely move lower.

Inside equities, AI and tech remain the centre of attention this week. While investors await Big Tech earnings on Wednesday and Thursday, Qualcomm stood out yesterday by announcing plans to launch new AI chips to compete with Nvidia and AMD in the rapidly expanding AI-chip market. Its AI200 and AI250 chips will hit the market next year, with Saudi Humane as its first customer. Nvidia and AMD could’ve felt queasy on the news — but no: both rose about 2.7–2.8%, as optimism spread that chip appetite keeps growing and there’s enough cake for everyone to have a generous slice. Qualcomm, meanwhile, jumped more than 20% intraday and closed the session roughly 11% higher.

In the coming days, we’ll find out Big Tech’s spending plans, which will directly affect chip-demand forecasts. Together, Amazon, Microsoft, Alphabet, and Meta are expected to have spent over $100 billion in Q3, most of it on chips and data centres. Bubble or not, the money is being spent, the rally is on — and it’s not a bubble until it bursts.