Tariffs, debt worries absorbed, equities march on

Sentiment across major US indices was surprisingly positive this week – considering an avalanche of relatively high tariff rates announced throughout the week – some of which were quite shocking, like the 50% tariffs on copper and Brazil, between 25% to 40% on Asian nations, and possibly 35% on Canadian goods imports.

But investors took the news with no apparent stress. They could’ve worried that the tariffs would lead to significant spikes in inflation, potential disruption in supply chains, and unnecessary economic slowdown – a combination that could result in possible stagflation and a hands-tied Federal Reserve (Fed). But no. We haven’t seen any of those risks being priced into equity markets. On the contrary, the S&P500 claimed its second all-time high on Thursday, as Nvidia helped boost appetite in AI stocks. Strong earnings and a positive outlook from Delta Airlines sent airline shares rallying, with Delta adding as much as 12%. United Airlines jumped 14%, while American and Southwest rose nearly 13% and 8%, respectively. Improved demand for travel hinted at stronger consumer sentiment – which had recently taken a hit due to tariff fears – and supported the hope that US consumer spending will defy the tariff hikes. We hope it will.

In the sovereign space, strong sales of US Treasuries throughout the week also supported the bullish sentiment – global investors signalled that they are ready to keep financing Trump’s ‘big, beautiful’ tax bill and the exploding US debt.

Across the Atlantic, the lack of news about a trade deal between the US and the EU kept investors in a sweet wait-and-hope mode and sent the Stoxx 600 to its highest levels in a month.

Elsewhere, the closely watched Japanese 20-year bond auction went relatively smoothly. Demand came in below the long-term average, but it was the strongest since March. As such, Japanese long-maturity yields are lower this morning: the 20-year yield is down to 2.50%, while the 30-year yield is testing the 3% mark to the downside.

As such, risks continue to be ignored by the market: good news grabs all the attention, while bad news is brushed under the rug. You don’t need CNN’s Fear and Greed Index to see that there is extreme greed in the markets these days – which also helps push Bitcoin, for example, to fresh all-time highs with eyes now set on the $120K per coin mark.

So it’s in this atmosphere of fragile optimism that the earnings season will kick off next week – fragile because earnings growth expectations have been revised down, from nearly 10% to around 5–7%, while S&P 500 stocks have been busy climbing the Everest.

While lower expectations are easier to beat and the softer US dollar should help sweeten revenues, the impact of trade uncertainties remains highly uncertain.

Anyway, you know what? Big bank analysts continue to raise their year-end forecasts for the S&P 500 and Nasdaq 100 – and pessimistic ones, like JP Morgan’s Marko Kolanovic, are being pushed out of their jobs. So it’s hard to call for a correction. Up we go, and we hope tariffs won’t hurt much.

In FX, the US dollar is better bid on reduced stress around tariffs and a softer perception of exploding US debt (while the reality HASN’T changed). The EURUSD consolidates below the 1.17 mark, Cable is preparing to test the 1.35 support – which also matches the 50-DMA – and the USDJPY remains bid, trading near 147 at the time of writing.

Given the strong bearish positioning in the dollar, we could see the greenback’s rebound gain momentum in the coming weeks and drag major peers lower. But the EURUSD should remain in its year-to-date bullish consolidation zone above 1.12 – the major 38.2% Fibonacci retracement of this year’s rally. Cable should maintain its positive outlook above 1.3140, while the margin for the yen is tighter: the USDJPY is already stepping back into the bullish consolidation zone above 147.50.

The upcoming Upper House elections in Japan and doubts about the LDP’s ability to maintain a majority are weighing on appetite for Japanese assets, including the yen. Trade tensions with the US aren’t helping either. So, the Nikkei remains under pressure despite some relief in JGBs and the cheaper yen. Politics could be a key driver of sentiment in Japan over the next few weeks.

Elsewhere, in energy, US crude failed to clear the 200-DMA yesterday and fell more than 2% – despite news that OPEC will stop adding extra barrels to the market after unwinding the last chunk of the 2.2mbpd cuts in September, fearing that too much oil would send prices to undesirably low levels.

Meanwhile, there’s chatter of stronger sanctions against Russia: Europe wants to cut the price cap on Russian oil from $60 to $45 per barrel, and a new bipartisan US bill proposes slapping 500% tariffs on goods from countries buying Russian oil. That would hit China and India – which together buy around 70% of Russian supply. Depending on how these EM giants react, demand for US and Brent crude could spike, pushing WTI and Brent prices higher. Alas, oil bulls are nowhere to be found this morning. Even news that the Red Sea is boiling again hasn’t helped. Key support for US crude remains at $65 per barrel, and for Brent at $67. Below those levels, oil will likely return to the first-half’s bearish trend.