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Trading Day: Market inflection points abound
Published by Global Banking & Finance Review®
Posted on June 3, 2025
8 min readLast updated: January 23, 2026
Global Banking & Finance Review®
Company
Published by Global Banking & Finance Review®
Posted on June 3, 2025
8 min readLast updated: January 23, 2026
The article analyzes market inflection points, highlighting trends and risks in global markets, influenced by trade tensions and economic data.
By Jamie McGeever
ORLANDO, Florida (Reuters) - TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Stocks and the dollar rose solidly on Tuesday even though markets lacked a central, driving force - signs of weakening economic activity, cooling labor markets and disinflation are all reasons for caution, but risk appetite continues to be fueled by hopes that U.S.-China trade tensions will soon ease.
In my column today I look at why foreign investors' exposure to U.S. assetsmay not be as high as feared. If it's not, the potential downside for Wall Street and Treasuries from diversification may be less severe. More on that below, but first, a roundup of the main market moves.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
1. Markets anxious as 'new cold war' turns hot: Mike Dolan 2. FX options market positioned for further dollar weakness 3. OECD lowers global outlook as Trump trade war hits U.S.growth 4. Japan to promote domestic ownership of JGBs, policydraft shows 5. G7 debt is now a pressure point for anxious marketsToday's Key Market Moves
* The S&P 500 hits a three-month high, rising 0.6% on theday, and the Nasdaq hits its highest level since February aftera 0.7% rise. * The dollar rebounds 0.6%, but only after plumbing afresh six-week low. It gains most vs yen, Swiss franc andSwedish krona, up 1% against all three. * One of the quietest days in weeks for the U.S. bondmarket, with the 10- and 30-year yields recording their smallestmoves since May 9. Each barely moves a basis point. * Oil rises for a second day, with Brent and WTI futuresup around 2%, on geopolitical tensions and supply worries. * Gold slips almost 1% but earlier in the day hits$3,392/oz, its highest since May 8.Market inflection points abound
Evidence is mounting that global economic activity is slowing, but this is failing to move the dial much for markets. Investors know growth is slowing and that the second half of the year will be challenging, so that's already 'in the price'.
Hopes of a de-escalation in the trade standoff between the U.S. and China, and for bilateral deals between the U.S. and other key trading partners soon are supporting risk assets.
The S&P 500 hit a three-month high on Tuesday, while the Nasdaq and MSCI World index climbed to levels last visited in February. It is the strength on Wall Street, most latterly tech, that is lifting global stocks as benchmark Asian and European indices are flatlining.
On the whole, policymakers continue to stress that they are data-dependent and will move on rates carefully and calmly. That was the message from various Fed officials this week and Bank of England Governor Andrew Bailey on Tuesday.
It's a slightly different - although no less challenging - situation in mainland Europe, where figures on Tuesday showed disinflationary forces are driving consumer prices as much as anything else.
Euro zone inflation dipped below the European Central Bank's 2% target in May, cementing expectations rates will be cut this week and later this year. Meanwhile, Switzerland experienced outright year-on-year deflation for the first time in four years, raising the possibility that the Swiss National Bank may soon reintroduce negative interest rates.
Canada's central bank is expected to hold interest rates at 2.75% on Wednesday for a second meeting. Growth and inflation have been surprisingly sticky this year, and rates have been slashed by 225 basis points since last June.
As UBS analysts note, markets are generally at an inflection point, waiting for the catalyst that will break them out of the narrow ranges that have broadly held since the U.S. and China announced a temporary reduction on tariffs on May 12. Even Wall Street and the dollar - one creeping higher, the other drifting lower - are awaiting a trigger for a proper breakout.
Could the telephone call between U.S. President Donald Trump and Chinese leader Xi Jinping expected later this week be it?
Foreign exposure to U.S. assets may be lower than feared
It is widely believed that investors around the world have a disproportionately high exposure to U.S. assets, particularly stocks, an imbalance that could roil U.S. markets if corrected. But what if these fears are overblown?
Several eye-popping statistics suggest that America's weight in world financial markets is even greater than its outsized economic might. Most strikingly, the U.S. net international investment position (NIIP), or foreign investors' holdings of U.S. assets less U.S. investors' holdings of overseas assets, at the end of 2024 was $26 trillion. That's nearly 24% of global GDP, up from 16% only two years earlier, a surge driven by foreigners' insatiable appetite for U.S. equities, mainly "Big Tech".
Demand was so hot that, by some measures, the value of U.S.-listed stocks at the turn of the year represented 74% of total global market cap. That share was 60% six years ago, and less than half in 2011.
But the attractiveness of dollar-denominated assets is now being questioned, as the often erratic policies of U.S. President Donald Trump have upset longstanding economic and geopolitical norms, making governments and investors question whether Washington is still a reliable partner on the global stage.
The concern is that this eroding confidence triggers a reversal of the massive flows into Wall Street seen in recent years that has damaging spillover effects.
Such a correction may not require outright selling. Given the scale of the flows involved, just less buying among foreign investors could be enough to cast a shadow over the world's most important stock market.
And the running assumption is foreign investors don't have the capacity or willingness to increase their exposure to U.S. assets, creating a significant long-term downside risk for Wall Street, Treasuries and the dollar.
"A structural shift is underway: the slow erosion of US economic dominance," analysts at Deutsche Bank wrote on Monday.
SKEPTICAL
But looked at another way, foreign exposure to U.S. assets may not be as high as initially meets the eye. That's the view of analysts at JP Morgan, who measure portfolio investment in U.S. bonds and equities as a share of countries' total household sector financial assets.
They use a broad definition for a country's "household" sector, covering investments by institutions like insurance companies and pension funds that are ultimately made on behalf of households. Using a broad range of data, from central banks, U.S. Treasury and OECD household financial asset flows, they measure the ratio of U.S. equity and bond holdings relative to household financial assets in each country.
They find that "relative to the total financial assets of households in the rest of the world, the allocations to U.S. assets typically stand at around 10-20%." As a result, they are "skeptical of the idea that foreign investors hold too much of U.S. assets."
Given that U.S. equities account for more than 70% of the MSCI global market cap and dollar-denominated bonds represent around 50% of global bond indices, according to JP Morgan estimates, the 10-20% exposure of foreign investors to U.S. assets does appear surprisingly low.
And the 10-20% figure would be even lower were it not for the outsized U.S. equity holdings at the Swiss National Bank and Norway's sovereign wealth fund.
On the bond side, foreigners' footprint in the U.S. Treasury market is shrinking. Data shows that they owned 31% of the $28.55 trillion outstanding Treasury debt at the end of last year. That share has been declining steadily since the Global Financial Crisis. In 2008, the figure was approaching 60%.
Overseas investors' share of the T-bill market has shrunk even more. In December, it was under 20%, near its lowest level on record and sharply down from 50% a decade before.
Nikolaos Panigirtzoglou and his team at JP Morgan aren't arguing investors will or should ramp up their purchases of U.S. assets. And in cases where allocations are high - such as the Taiwanese exposure to U.S. bonds or Canadians' holdings of U.S. stocks - diversification would hardly be a surprise.
But there is "little indication" of broad-based selling of U.S. assets by foreign investors so far this year, they note. And if that selling does materialize, it may be far lighter than many expect.
What could move markets tomorrow?
* Australia GDP (Q1) * South Korea inflation (May) * South Korea GDP (Q1, revised) * UK services PMI (May) * Canada interest rate decision * U.S. services ISM (May) * U.S. ADP employment (May) * Federal Reserve releases Beige BookOpinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
Evidence is mounting that global economic activity is slowing, yet this is not significantly impacting market movements. Investors are aware of the slowing growth and are adjusting their strategies accordingly.
It is widely believed that foreign investors have a high exposure to U.S. assets, but analysts at JP Morgan suggest that this exposure may not be as significant as initially thought.
Policymakers, including the Federal Reserve and the Bank of England, emphasize that they are data-dependent and will approach interest rate changes carefully, reflecting the cautious sentiment in the markets.
Hopes for de-escalation in the trade standoff between the U.S. and China are supporting risk assets, as investors anticipate potential bilateral deals that could stabilize the markets.
Disinflationary forces in mainland Europe are driving consumer prices, with Euro zone inflation dipping below the European Central Bank's target, leading to expectations of interest rate cuts.
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