Today’s trade deal ignited global markets.  Take a look…

Trade Deal Ignites Global Markets
May 12 (King World News) – Peter Boockvar:  So, both sides luckily decided to save Christmas. China gave hope to some of its manufacturing base that caters to the US while the US side listened to the existential crisis of many small businesses. Whether still a 30% tariff will be enough to make a difference we’ll of course see but for some, you are going to see a rush of ordering over the next 90 days the likes we’ve never seen before. You are going to see the cost of transportation skyrocket too in the coming weeks/months.

The stock market has of course spoken again that it wants nothing to do with tariffs but we’re also seeing US dollar cross rates have become too a daily voting machine on the policies of the US and attractiveness of our markets. With regards to fixed income, bond yields are rising across the world on some economic sanity and excitement over the detente.

Stocks Spike
Technically speaking we’re at key spots. The S&P futures are retesting its 200 day moving average.

Interest Rates Surge
The 10 yr US yield at 4.44-.45% is now a few bps above all its key moving averages.

US Dollar Surges
And the US dollar index is about 30 cents from its 50 day moving average, though well below still the 200 day.

I do want to put some numbers around the 10% baseline tariff on all US imports of goods that seemingly will be the minimum rate of all these country negotiations. As we import about $3.3 trillion worth of goods, that would be the equivalent of an incremental US corporate tax of $330 billion. The revenue collected from the US corporate income tax is expected to run this year at about $525 billion for comparison. Back of the envelope assuming the 21% corporate tax rate (obviously some pay less and many small business businesses pay pass thru rates), this is off $2.5 Trillion of pre tax income. If I add the $330 billion to the $525 billion, the $855 billion of total corporate taxes that will be paid under this 10% tariff regime would be the equivalent of a 34% corporate income tax rate which happened to be about where it was before Trump rightly cut it in 2017.

Just some perspective. Yes, not all companies will eat the 10% tariff but many don’t eat the corporate tax rate either as they pass it on to the rest of us.

Some more perspective that I got from Barron’s over the weekend, the importance of the need for lower tariffs. “Some 250,000 small businesses import goods or materials representing a third of the total value of US imports, according to the Chamber of Commerce. And 40% of those…building their products in the US, but requiring raw material or other inputs from abroad.”

Regardless of what the end result will be from both where tariff rates will settle out (10% or more) and hopefully lower trade barriers around the world, it is clear that foreigners have had a rethink of their US market exposure. Not that they don’t want any, they just seemingly want less off extreme allocation levels. What I’m most interested in seeing soon are the updated 13Fs and 13Ds reflecting the ownership of US stocks.

Below are the top 10 holdings of the investment arm of Norwegian central bank, the Norges Bank, as of December 31st to make my point of how over-exposed at the peak foreigners had to US markets. As the Mag 7 trade is likely over, as you’ve heard me argue over the past 3 months, and the action reflects this, foreigners are finding other things to buy and of course have gotten shocked by our tariff war.

KING WORLD NEWS NOTE: Norwegian Central Bank Gambled Big On Historic US Tech Bubble

Start Of A Long-Term Shift Out Of US Dollar
In case you didn’t see the FT Weekend article titled “Dollar asset selling signals start of longer-term shift, warn investors.” In it, “Finland’s Veritas Pension Insurance Company reduced its US equity exposure in the first quarter. Chief Investment Officer Laura Wickstrom told the Financial Times that valuations on US stocks were high while she also cited ‘the uncertainty and the communication around tariffs…the confusion and unpredictability associated with that made us question the idea that you should pay that sort of premium.”

Also, “John Pearce, chief investment officer at A$149 Australian pension scheme UniSuper, said on its podcast last month that his fund had quite a large exposure to US assets and would be ‘questioning that commitment.’ He added: ‘Frankly, I think we’ve seen peak investment in US assets.’ “

More, “Danish pension funds embarked in the first quarter on their first sale of US stocks since 2022, making their largest purchase of European listed shares since 2018.”

Lastly, Sam Lynton Brown, global head of macro strategy at BNP Paribas had a thought experiment according to the article, “if European pension funds were to reduce their allocation to 2015 levels, that would equate to selling as much as 300b euros in dollar assets.” https://www.ft.com/content/4d7892b3-ec07-4ae9-ae93-dcd34ad42c5b

Bottom Line
Bottom line, we are talking about the pendulum swinging in the other direction from the extreme US asset global love that peaked in January and mean reversion inflection points is what is being discussed here. The US economy and markets will always be the most attractive globally I still believe but it’s clear that foreigners got way over their skis in terms of US allocations and valuations, and changing fundamentals and a global tariff war was all that was needed for a global rethink.

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