Trade and inflation in focus

Trade headlines are striking an optimistic tone this week. According to Bloomberg, US and Chinese officials have agreed to a plan ‘to ease trade tensions,’ a move that could revive the flow of sensitive goods between the world’s two largest economies. Meanwhile, the US and Mexico appear close to finalising a deal that would lift the 50% tariffs on steel imports.

Risk sentiment across Asian markets is broadly positive. The Chinese CSI 300 is up 0.82% as of this writing, while the Hang Seng has gained 0.95%. US equities also closed higher yesterday, with Big Tech leading the advance on hopes that a trade deal could unlock the flow of rare earth metals.

Zooming in, Nvidia rose nearly 1% following news that TSMC’s May sales jumped 40%. Energy stocks rallied 1.8% as U.S. crude briefly tested a confluence of key technical levels — the 38.2% Fibonacci retracement of the year-to-date decline and the 100-day moving average. However, oil failed to close above that threshold. This morning, WTI is hovering near $65 per barrel, with sentiment supported by an apparent narrowing of supply–demand imbalances.

The US Energy Information Administration (EIA) yesterday projected that U.S. oil production has likely peaked and could fall to 13.37 million barrels per day next year — down 120,000 barrels from its May estimate. The agency also trimmed its global oil demand forecast, now expecting an increase of 800,000 barrels per day, down from a previous estimate of 1 million. However, demand projections may improve if trade tensions ease further.

Still, weaker US output is just one part of the global picture. OPEC+ supply increases, and the EIA expects global inventories to build by roughly 800,000 barrels per day. Add in the macro drag from trade-related uncertainty, and it’s unlikely we’ll see oil prices rally without restraint. Whether oil bulls can reverse the year-to-date slide may hinge on breaking through the critical $65.35/barrel level — the 38.2% Fibonacci retracement. Sustained optimism on trade will be key to validating a medium-term bullish reversal.

That said, US and European equity futures are modestly lower this morning, likely reflecting some disappointment over the lack of concrete detail in trade negotiations. Officials are now expected to present the proposals to their respective presidents.

In the meantime, international institutions are adjusting their growth outlooks. Following last week’s OECD downgrade, the World Bank cut its 2025 global growth forecast to 2.3% (down from 2.7% in January), citing trade tensions and policy uncertainty. That would mark the slowest pace of growth in 17 years, excluding crisis periods like the GFC and COVID.

Meanwhile, Citigroup is reportedly preparing to set aside several hundred million dollars more than last quarter to cover potential loan losses — an early indication that large U.S. banks may be bracing for a more challenging macro environment.

Weakening business and consumer sentiment — compounded by potential disruptions to global trade routes — could drag on economic activity and growth. Yet, equity markets remain near record highs, seemingly disconnected from these risks.

Interestingly, institutional exposure remains light. According to Deutsche Bank, equity positioning has only been lower 23% of the time since 2010. That suggests the recent rally may be driven largely by retail demand, which could explain the divergence between price action and fundamentals.

Still, equity bulls may need a solid narrative to push major U.S. indices to — and beyond — fresh all-time highs. The S&P 500 is currently less than 2% below its February peak, and the Nasdaq 100 is just 1.3% away from its own record. Small- and mid-cap stocks are rebounding more slowly, as rate cut expectations have been dialed back due to resilient U.S. labour data and upward inflation pressures tied to tariffs.

Today’s US CPI report will be key. Core inflation is expected to accelerate to its highest monthly pace this year. A hot print could dampen dovish Federal Reserve (Fed) expectations, push the US 2-year yield further above 4%, and weigh on equity sentiment. A cooler reading, however, may reignite rate cut hopes and support valuations.

In FX, the U.S. dollar is firmer in Asia, underpinned by positive trade news. The EURUSD is trading just below 1.14, while Cable slipped under 1.35 ahead of UK Chancellor Rachel Reeves’ budget announcements.

The UK jobs data released yesterday was grim: more than 250,000 jobs have been lost since October’s budget announcement. Higher taxes are weighing on employment and sustaining inflationary pressure, complicating the Bank of England’s (BoE) policy outlook. Still, markets are increasingly pricing in rate cuts amid signs of further weakness.

Despite that, the FTSE 100 remains near all-time highs. With limited exposure to the domestic economy and strong representation from energy and financials, the index may continue to benefit from softer BoE expectations and supportive global headlines — even if the domestic backdrop darkens.