By Jamie McGeever
ORLANDO, Florida (Reuters) – TRADING DAY
Another wild one on Wall Street as Fed, BOJ decisions loom.
U.S. stocks fell on Tuesday, buckling under the weight of worry building on multiple fronts from geopolitical tensions to the outlook for Big Tech, from economic uncertainty to deepening unease around President Donald Trump’s trade wars.
The selloff is a reminder, as if one were needed, of how fragile market sentiment is right now – visibility on the economic, policy, and geopolitical outlooks is minimal. No wonder investors are jittery.
Treasuries failed to catch much of a safe-haven bid, perhaps because investors wanted to keep positioning light ahead of the Fed’s policy decision on Wednesday. But gold did, leaping 1% to a new high above $3,000 an ounce.
Wall Street’s losses on Wednesday, coupled with Europe’s rally after Germany’s parliament approved plans for a massive spending surge, highlight the degree of America’s equity underperformance against the ‘Rest of the World’.
It’s a trend that seems more likely to continue than reverse. More on that below, but first, here are how world markets stacked up on Tuesday.
Today’s Key Market Moves.
U.S. President Donald Trump and Russian President Vladimir Putin on Tuesday discussed a potential 30-day ceasefire in the Russia-Ukraine war. But while Moscow agreed to stop attacking Ukraine’s energy infrastructure, it did not agree to a blanket 30-day ceasefire.
This helped keep the selling pressure bearing down on Wall Street, and maintain the bid under gold and the Swiss franc.
Barring unforeseen developments on the geopolitical or trade war fronts – a brave assumption these days – investors’ attention now switches to the big central banks. First up on Wednesday is the Bank of Japan, then the Federal Reserve.
It’s probably no surprise, given the volatile global climate, that hawkish expectations for the BOJ are fading. No one was expecting another rate hike on Wednesday anyway, but rates markets are not fully pricing in the next 25 bps hike until September. And that’s it for the year.
This could explain why the yen has eased off lately, failing to get much support from safe-haven demand or surging Japanese bond yields.
Investors’ attention on the Fed, meanwhile, will be split between policymakers’ new economic projections, what they say about the central bank’s balance sheet rundown, and the signals drawn from Chair Powell’s press conference.
Markets, especially the bond market, could be coiled for a big move, and there are several lines of questioning to Powell that could provide the trigger – tightening financial conditions, Wall Street’s weakness, the impact of Trump’s tariffs on growth and inflation, recession risks, or spiking consumer inflation expectations.
It’s shaping up to be a fascinating day across U.S. and world markets.
Investors RoW back on Wall Street exceptionalism
As the end of the first quarter approaches, world stock markets are in a curious position. They are benefiting from capital flowing out of Wall Street, but they also face major risks if the U.S. selloff turns into a rout.
As President Donald Trump’s trade war has snuffed out the “U.S. exceptionalism” narrative, a yawning gap has opened between U.S. equities and those in the ‘Rest of the World’.
The selloff abated briefly and the S&P 500 notched its first consecutive daily rises in a month. But Wall Street was back in the red on Tuesday, and U.S. underperformance – the widest in more than 20 years, by some measures – shows little sign of reversing course.
Indeed, history suggests this gap could widen further, although only if the U.S. economy avoids tipping into a serious recession.
CORRECTION THRESHOLD
As the S&P 500 flirted with 10% correction territory last week, ‘RoW’ markets were outperforming by as much as 9 percentage points, the biggest such gap since 2002, according to strategists at Citi.
Historically, when U.S. corrections eclipse the 10% mark but don’t breach the 20% ‘bear market’ threshold, Wall Street underperforms over the entire downturn, Citi noted. In U.S. bear markets and recessions, however, no country or market is immune – growth and asset prices everywhere suffer.
This scenario appears to be unfolding. Most economists agree that U.S. growth will slow this year, but few think it will fall off a cliff. While the Atlanta Fed’s GDPNow model is signaling a 2.1% contraction in Q1, that remains an outlier.
Contrast that with the sudden improvement in Germany’s growth outlook thanks to Berlin’s proposed fiscal bazooka. Beijing also appears ready to do whatever it takes to support China’s economy and markets – call it the ‘Xi put’.
Indeed, the tailwinds for RoW outperformance seem to be building.
CROWDED OUT
The rotation out of Wall Street to the rest of the world has been underway all year. Bank of America’s March fund manager survey shows that allocations to euro zone markets are the highest since 2021, while U.S. allocations plunged at the fastest rate on record.
This might suggest the switch has run its course. But the same survey also showed that the most crowded trade is still ‘long’ the Magnificent Seven shares of America’s biggest tech firms.
And even though U.S. earnings multiples have fallen to the lowest point since September, they remain lofty by historical standards due to Big Tech’s still-rich valuations. Indeed, U.S. stock valuations remain well above those in other developed markets, so this rotation may be far from over.
FINE LINE
“Corrections are healthy, they’re normal,” Treasury Secretary Scott Bessent told ‘Meet The Press’ on Sunday, adding: “I’m not worried about the markets.
Corrections are indeed normal and healthy, occurring roughly once every couple of years with an average decline of 14%. As Mark Riepe at Charles Schwab points out, of the 27 corrections since 1974 including the current one, only six have gone on to become bear markets.
But Bessent’s remarks could also be interpreted as a sign of how relaxed the Trump administration is about the current decline, suggesting they won’t act to prevent a further slide. It’s a risky stance to take at such a delicate juncture for the economy.
And the RoW needs to watch out, because its outperformance will likely only continue if the U.S. doesn’t implode. As Dario Perkins at TS Lombard notes, “Make no mistake – a U.S. recession would bring down the entire world.”
That would quickly wipe out Wall Street’s underperformance, but unfortunately, also a whole lot more.
What could move markets tomorrow?
If you have more time to read today, here are a few articles I recommend to help you make sense of what happened in markets today.
I’d love to hear from you, so please reach out to me with comments at . You can also follow me at [@ReutersJamie and @reutersjamie.bsky.social.]
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(By Jamie McGeever, editing by Deepa Babington)
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