by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news that the European Union is preparing to ratchet up its retaliation against the Trump administration’s tariffs. We next review several other international and US developments with the potential to affect the financial markets today, including the likely fall of the Dutch government and another interesting nuclear energy deal for artificial intelligence in the US.

European Union-United States: Just days after President Trump said he would raise the US import tariffs on steel and aluminum to 50% from their current 25%, an EU spokesman announced yesterday that the bloc is preparing an expanded list of countermeasures against US goods and services if the current US-EU trade negotiations falter. The statement is a reminder that the tariff war still has the potential to spiral out of control, despite the recent cooldown amid US trade talks with various economies.

European Union-China: The EU yesterday confirmed that it will use its new International Procurement Instrument to restrict imports of Chinese medical devices in retaliation for discriminating practices in China’s public procurement systems. Even though the EU and China have tried to increase trade cooperation recently to offset President Trump’s aggressive tariff policies against them, the EU’s announcement will likely set that effort back significantly.

Netherlands: Far-right firebrand Geert Wilders today said he will withdraw his Freedom Party from the governing coalition because of the other coalition parties’ failure to accept his plan to stem asylum applications. The three small parties remaining in the coalition don’t have a majority in parliament, so it appears that Prime Minister Schoof will have to call new elections, which would likely be held in September. The result could be months of political uncertainty in the Netherlands and a new test of strength for Europe’s far right.

United Kingdom: Prime Minister Starmer yesterday unveiled a Strategic Defense Review calling for a major program of defense rebuilding in the UK. Although Starmer refused to commit to specific defense spending targets, his plan envisions several major initiatives, including nearly doubling the UK’s fleet of destroyers and frigates, investing in 12 new nuclear-powered attack submarines, and modernizing the country’s nuclear arsenal. In response, key British defense stocks appreciated sharply yesterday.

Russia: Officials in Moscow last weekend installed an elaborate statue of dictator Josef Stalin in one of the subway system’s busiest stations, marking the government’s latest step to revive his legacy. President Putin, Russia’s current authoritarian leader, also recently signed a decree renaming Volgograd’s airport Stalingrad, as the city was known during World War II. The moves show that even long after Putin has consolidated his political position in Russia, he continues to develop the country’s authoritarian system.

South Korea: According to exit polls, Lee Jae-myung of the leftist Democratic Party is leading today’s presidential voting with about 51.7% of the vote. Lee’s main challenger, conservative former Labor Minister Kim Moon-soo is currently projected to get 39.3%. If Lee wins as expected, South Korean foreign policy could become somewhat more accommodating to China and North Korea, while relations with the US regarding trade and security could become more fraught. The result could be more challenging conditions for South Korean stocks.

US Nuclear Energy Industry: Meta Platforms has signed a 20-year purchase agreement for the electricity from one of Constellation Energy’s nuclear plants in Illinois, providing energy for Meta’s artificial-intelligence efforts and helping fund Constellation’s relicensing and upgrades to the plant. The deal echoes the contract last year in which Microsoft signed a long-term deal for AI energy from Constellation’s plant at Three Mile Island in Pennsylvania. Today’s agreement will likely help rekindle interest in nuclear power and help boost uranium prices again after a soft period.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with more evidence that geopolitical and economic tensions may be heating up again between the US and China. We next review several other international and US developments with the potential to affect the financial markets today, including a right-wing victory in Poland’s presidential run-off election and a Federal Reserve policymaker’s suggestion that any rise in price inflation because of President Trump’s tariffs could be short-lived enough to allow the central bank to resume cutting interest rates later this year.

United States-China-Asian Allies: At the Shangri-La Dialogue in Singapore on Saturday, Defense Secretary Hegseth warned that China “seeks to become a hegemonic power” in Asia and is now a real and potentially imminent threat to Taiwan and other US allies in the region. Hegseth pledged US support to help the allies counter China’s threat, but he also argued that they should boost their defense spending to 5% of gross domestic product, as many European countries are now aiming to do in response to the threat of aggression from Russia.

• Investors have naturally focused on trade policy over the last few months, but Hegseth’s statement is a reminder that the US — the reigning global hegemon — still faces a big geopolitical challenge from China.
• China continues to strengthen militarily, economically, and technologically, and we believe that it seeks to become the dominant power not only in Asia but probably globally. President Trump is sensitive to growing isolationist sentiment among many in his base, but some in his administration are still focused on defending US hegemony.
• We still believe that the US and China are in a spiral of increasing tensions. While investors rightly worry about the impact of Trump’s trade policies, they should also keep in mind the risk of geopolitical conflict and the many ways in which US-China tensions could increase, as shown in our US-China Escalation Ladder.

United States-China: Speaking of the US-China trade war, President Trump on Friday accused the Chinese government of violating the 90-day truce reached on May 12. Although Trump didn’t say how Beijing had violated the deal, US Trade Representative Greer later revealed that the violation involved moving too slow to reverse its ban on Chinese rare earth exports.

• In a previously unreleased letter from May 9, global auto firms representing the likes of General Motors, Ford, Toyota, Volkswagen, and Hyundai warned the administration that China’s rare-earths export ban could force the shutdown of auto factories within weeks. Other industries ranging from aerospace and defense to semiconductors would also be at risk.
• Further statements by administration officials confirm that last week’s new ban on sending US aerospace and semiconductor technology to China was to retaliate for China’s continued restriction on rare-earth exports, as was the administration’s vow to revoke the visas of Chinese students studying in the US.
• The Chinese government today accused the US of “seriously violating” the 90-day trade truce with its actions on technology and visas. It vowed to retaliate strongly, signaling a continued spiraling of tensions between Washington and Beijing.

United States-Taiwan: In a little-noticed statement to Congress recently, retired Navy Adm. Mark Montgomery revealed that the US now has about 500 military trainers in Taiwan, more than 10 times the number previously known. Although he didn’t say whether the trainers were active-duty troops, reservists, or civilian contractors, Montgomery argued the US should double the size of the team to help Taiwan develop “a true counter-intervention force” that could resist any attempt by China to take control of the island.

• Montgomery’s statement suggests the Trump administration has ramped up military support to Taiwan, just as it has for other allies in the region, such as the Philippines.
• To reiterate, US-China geopolitical frictions continue to worsen, even beyond the economic issues involved in their current trade war.

Poland: In the second and final round of the country’s presidential election yesterday, Karol Nawrocki of the right-wing nationalist Law and Justice Party narrowly won with 50.9% of the vote, beating the liberal mayor of Warsaw, Rafał Trzaskowski, with 49.1%. Poland’s president can veto legislation or refer it to the Constitutional Court, so Nawrocki’s win ensures that Law and Justice can keep blocking aspects of Prime Minister Tusk’s centrist agenda. Nawrocki’s win also points to continued gains by Europe’s right-wing parties.

Russia-Ukraine War: In a surprise drone attack on several key air bases across Russia’s territory over the weekend, Ukraine appears to have destroyed or damaged dozens of Russia’s 100 or so long-range Tupolev bombers. The attack apparently involved sneaking large numbers of drones into Russia by truck, hiding them in crates that doubled as launching platforms once they got close to the targeted bases.

• The loss of the bombers is expected to crimp both Russia’s ability to bomb Ukraine and its ability to project power beyond its borders.
• We also think the Ukrainian attack echoes aspects of Israel’s 2024 attack on hundreds of Hezbollah fighters using hidden explosives in their pagers. Kyiv’s tactic of hiding and launching the drones using crates carried by truck is a further sign that countries are now willing to compromise common, everyday products to deliver weapons for long-range, remote attacks outside their borders.

Global Oil Market: Saudi Arabia, Russia, and some other members of the OPEC+ grouping on Saturday said they would boost their collective oil output by 410,000 barrels per day, starting in July. That would mark the third straight month of increased production. The increase reflects pressure from President Trump, the Saudis’ intent to win back market share, and the group’s optimism about future global demand. However, if demand comes in softer than they anticipate, the production increase would likely help keep oil prices near their current modest levels.

US Monetary Policy: At a conference in South Korea today, Fed board member Christopher Waller said any rise in consumer price inflation because of the Trump administration’s new tariffs could be short-lived, given that there is less fiscal stimulus and the labor market isn’t as tight as in 2022. According to Waller, that could still allow the Fed to cut interest rates further in late 2025, not because of economic weakness but because of renewed disinflation.

US Fiscal Policy: In a television interview yesterday, Treasury Secretary Bessent insisted the US “is never going to default,” despite continuing large budget deficits putting it on track to hit its legal debt limit in August. Bessent’s comment was a response to JPMorgan CEO Dimon’s warning on Friday that the US bond market could buckle if the federal government doesn’t contain its debt soon.

• We believe Congress will raise the debt limit in time to avoid a default this summer. Still, Dimon’s statement helps underline the risk that growing federal debt could increasingly hamstring fiscal policy and potentially prompt investors to abandon US obligations.
• It is extremely difficult to predict when investors might decide to dump US debt. Nevertheless, rising long-term yields suggest at least some investors may be getting more concerned.

US Trade Policy: Visiting a United States Steel plant on Friday, President Trump said he would further hike the US tariff on steel and aluminum imports to 50% on June 4, compared with 25% currently. According to Trump, the higher tariff would help protect US steelworkers and support the expected “partnership” deal between Japan’s Nippon Steel and US Steel, in addition to helping the domestic aluminum industry.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The White House is once again using Friday to remind markets about its trade concerns. Today’s Comment will discuss how a provision in the tax bill could discourage foreign investment in the US, explain why the administration is crafting a backup plan for tariffs, and report on other latest market-moving developments. As always, we’ll also include a roundup of key domestic and international economic data.

Taxing Foreigners: A little-known provision within the tax bill has caused a stir on Wall Street due to its potential to hurt the US’s safe-haven status.

• Section 899 of the recently passed House legislation authorizes the US government to implement reciprocal tax measures against investors and corporations from countries found to maintain discriminatory tax practices targeting American entities. The provision’s broad scope could significantly affect both: (1) US-domiciled firms with substantial foreign ownership, and (2) multinational corporations maintaining operations or investment ties in the US.
• The measure appears primarily targeted at the European Union, which US officials have accused of maintaining discriminatory policies against American companies. The White House has repeatedly urged the EU to reform its Value-Added Tax (VAT) system, arguing it creates unfair trade advantages for member states. This tension has escalated as several EU countries (most recently Germany) have moved forward with proposed digital taxes that would disproportionately affect US tech giants like Meta and Google.

• However, the provision contains significant ambiguity regarding its application to US Treasury securities. While the legislation clearly subjects foreign holders of equities and corporate bonds to potential levies, it fails to clarify whether purchases of government debt — traditionally exempt from such taxation — would also become taxable. The lack of clarity could create an incentive for foreign investors to purchase even more US government bonds.
• This law essentially functions as a form of capital control. Its underlying rationale likely stems from a desire to pressure foreign elites into advocating for US interests, particularly regarding regulatory restrictions. By targeting influential individuals who comply with laws that disadvantage American companies, the US is effectively leveraging financial coercion. The potential impact is twofold: It could drive increased investment into US Treasurys, or it trigger capital outflows from equities.

Trade Developments: The Trump administration has received a reprieve from the courts on its tariffs but is already searching for a backup as it looks to regain leverage in trade talks.

• A US federal appeals court has lifted the hold on global tariffs, clearing the way for the White House to escalate the issue to the Supreme Court. This decision is expected to reinstate the president’s import tariffs, reinforcing his push to reshape US trade policy. However, the long-term viability of these levies remains uncertain. The reprieve came after two separate rulings deemed the administration’s approach as unlawful.
• As noted in yesterday’s comment, the president has options should the tariffs be deemed unconstitutional. The administration is exploring the use of the Trade Act of 1974, which permits temporary tariffs of up to 15% for 150 days to rectify trade imbalances. Additionally, the White House is preparing to leverage Section 301, which grants the US authority to investigate and retaliate against unfair trade practices. There have also been discussions about invoking the Smoot-Hawley Tariff Act of 1930 as a potential fallback.

• That said, the ruling has significantly impacted perceptions of the US’s capacity to negotiate effectively with its trading partners. While the US and the European Union have committed to ongoing dialogue in an effort to resolve their trade differences, discussions between the US and China have, by contrast, reportedly reached an impasse. Following the court’s decision, President Trump sharply criticized China for failing to meet its trade agreement commitments.
• The ongoing tariff dispute is likely to fuel further market uncertainty regarding future trade policy. Investors now face a dual challenge where they must not only assess whether new tariffs will be implemented, but also whether existing ones will remain in place. This persistent ambiguity will disproportionately pressure firms with significant trade exposure. Given these conditions, we maintain that the most compelling opportunities lie in companies with resilient earnings power and fortified supply chains.

Monetary Policy Dilemma: President Trump and Fed Chair Powell met this week for the first time since November 2019 to discuss the economy.

• During the meeting, President Trump pressed Chair Powell to cut interest rates at the upcoming FOMC meeting, arguing that the US should align with other central banks’ policies. However, the Fed chair avoided signaling any commitment to the president’s demands, instead emphasizing that the Fed’s decisions would remain data-dependent and based on economic developments.
• The challenge confronting the president and Federal Reserve officials is the impact of US tariffs on both the domestic and global economies. Tariffs, or import taxes, serve two main purposes: revenue generation and import restriction. The latter is arguably the more complex aspect. While US tariffs have the potential to inflate domestic prices by increasing the cost of imported goods or limiting supply, they can simultaneously lead to excess foreign capacity, thereby driving down prices abroad.
• This dynamic is likely to place the Federal Reserve at a disadvantage relative to its international peers. Assuming all other factors are constant, foreign central banks possess greater latitude to implement rate cuts because the decline in exports due to US tariffs has created a surplus of domestic supply, prompting them to stimulate demand. Conversely, the reduction in foreign imports means the Fed may need to maintain higher rates to prevent increased demand from exacerbating domestic supply chain constraints.
• The key uncertainty lies in how US businesses will adapt to tariffs. Some firms may attempt to pass through higher costs, which would reinforce the Fed’s current policy stance. Others may resort to workforce reductions to mitigate the financial impact. This divergence in responses makes unemployment the potential swing factor in the tariff policy calculus.
• We acknowledge the possibility of both higher inflation and higher unemployment, but we’re not convinced they’ll trend upward simultaneously. This phenomenon, known as stagflation, typically occurs during sharp increases in energy prices, which are currently trending downward. Given the hiring trends and the limited purchasing power of households since the pandemic, we believe a cooling labor market is the most likely scenario. Consequently, we think the Fed could still cut rates this year.

Demand Optimism: Despite recession concerns, there are still signs that households may not be changing their spending habits by much.

• Recent driving data indicates that Americans hit the road in greater numbers this holiday weekend. According to GasBuddy, gasoline consumption has increased by 2% compared to the previous year. This uptick suggests households may be shifting spending away from goods and toward services — a potential strategy to mitigate the impact of rising tariffs.
• The shift toward service-oriented spending is expected to bolster the economy amid ongoing uncertainty. This trend will likely persist, provided that businesses keep prices in check. As a result, an immediate recession seems unlikely.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are actively digesting this morning’s landmark court ruling on tariffs. Today’s Comment examines how the Trump administration might respond to this latest trade policy setback, discusses the market implications of Nvidia’s stronger-than-expected earnings, and reviews other notable news moving global markets. As always, we’ll wrap up with a comprehensive overview of today’s most important domestic and international economic data releases.

No TACO For Trump: A court ruling has delivered a major setback to the US president’s trade agenda, yet his supporters are pressuring him not to retreat.

• The US Court of International Trade ruled that the president lacked the authority to impose tariffs under the emergency economic powers legislation he cited. This decision will invalidate certain reciprocal tariffs enacted on April 2, while leaving in place sector-specific tariffs on automobiles and steel. Although the White House has stated it will appeal the ruling, the verdict raises doubts about the legality of his broader tariff strategy.
• The ruling is expected to halt 6.7% of levies announced this year. However, the president appears to have alternative options to circumvent the court’s decision. According to Goldman Sachs, the administration could implement Section 122 tariffs for up to 150 days as a replacement for reciprocal tariffs, while simultaneously applying Section 301 and 232 tariffs on a country-specific basis.
• That said, the ruling could place the White House in a difficult position as it seeks to negotiate trade agreements with other nations. In recent weeks, tariff threats have successfully pressured several countries into trade discussions. Notably, the European Union, which initially pushed for complete tariff elimination, has now softened its stance, seeking reduced tariffs in exchange for concessions in other areas.

• Additionally, Trump faces mounting pressure to maintain his stance, particularly given concerns over market stability. The White House was compelled on Wednesday to push back against claims that “Trump Always Chickens Out,” a narrative that belittles the so-called “Trump put,” the perception that the president will consistently safeguard equity markets.
• While the court’s decision represents a setback for the administration, it is unlikely to be the final word on the matter as the White House prepares its appeal. Investors should therefore view the tariff reversal with caution. Our primary focus will be on the president’s response, as he may use this ruling to reinforce his protectionist stance rather than retreat. Given the potential for increased volatility, we maintain that conservative investors should adopt a wait-and-see approach in the current environment.

AI Rally Continues: Big tech stocks rallied on Wednesday after the world’s leading chipmaker reported stronger-than-expected earnings, reinforcing confidence in the sector’s growth.

• Nvidia surpassed analyst expectations with a strong quarterly revenue of $44.1 billion, marking 70% year-over-year growth despite significant headwinds from US export controls. The results comfortably exceeded Wall Street’s $43.3 billion consensus estimate, demonstrating remarkable resilience in the face of geopolitical challenges. For the current quarter, the chipmaker issued bullish guidance of $45 billion in revenue while disclosing an anticipated $8 billion hit from ongoing China sales restrictions.
• The earnings beat is poised to reinvigorate confidence in the AI rally, which has been largely driven by the seven biggest tech giants propelling the S&P 500. Recent concerns over US trade restrictions, particularly on exports, had raised fears that tech earnings could suffer and potentially dampen investment enthusiasm. Yet, Nvidia’s robust results suggest that major players remain committed to AI investments and undeterred by global economic uncertainty.

• Despite reporting robust earnings, Nvidia raised alarms over potential new US export controls on China. In a direct appeal to President Trump, CEO Jensen Huang warned that existing restrictions could completely shut Nvidia out of the Chinese market — a devastating outcome for the chipmaker’s revenue. His plea follows reports that the Trump administration is considering expanded bans, including cutting off sales of critical chip design software to China.
• The strong earnings report indicates that high-quality risk assets will remain appealing to investors navigating ongoing economic uncertainty. Companies with robust earnings growth potential and minimal foreign supply chain exposure are particularly well-positioned in this environment. Additionally, firms aligned with government strategic priorities, such as AI, present compelling opportunities for investment.

FOMC Meeting Minutes: According to its meeting minutes, the Federal Reserve opted to hold interest rates steady as it continues to navigate the economic fallout from the trade war.

• During the FOMC meeting held on May 6-7, Fed officials acknowledged they might face difficult trade-offs when deciding which aspect of their dual mandate — price stability or full employment — to prioritize. Their unease stemmed from navigating turbulent financial market conditions, including heightened volatility in equities and bonds. Adding to their concerns was the dollar’s significant depreciation, which further complicated the economic outlook.
• On a positive note, Fed officials expressed cautious optimism that households could weather the impact of tariffs. While acknowledging rising delinquencies on auto and credit card loans, they noted that household balance sheets remain fundamentally strong. Additionally, some policymakers suggested that lower energy prices might help offset trade-related pressures. There was even hope that consumer spending could gradually shift from goods to services, further easing economic strains.
• On the other hand, Fed officials also highlighted several growing vulnerabilities in the economy. One key area of concern is rising leverage within the financial sector, with banks potentially exposed to interest rate risks and hedge funds carrying significant debt. Additionally, they expressed concerns about the weakening status of US assets as a safe haven, raising questions about the economy’s long-term stability.
• Regarding policy, there appears to be broad agreement that significant uncertainty will persist until the president finalizes tariff rates. The staff economic outlook projects inflation will prove transitory, with a temporary increase this year and next before returning to the 2% target by 2027. Additionally, staff estimates suggest the unemployment rate may rise above its natural level by year-end.
• The meeting minutes indicate that the central bank may refrain from cutting rates at its next meeting and could delay rate cuts this year if inflationary pressures persist. This stance would likely push bond yields higher while dampening bond prices. Moreover, elevated interest rates may weigh on equity markets, particularly riskier assets.

DOGE Future: Tesla CEO Elon Musk has officially stepped down from overseeing the cost-cutting initiative, though the future of his efforts remains uncertain. 

• The world’s richest man has stepped down from his role to dedicate more time to his business ventures. His position as a “special government employee” was capped at 130 days, meaning it was always expected to conclude by the end of the month. While leading the Department of Government Efficiency, he was tasked with identifying cost-saving measures to reduce government spending. While he successfully uncovered some inefficiencies, the effort fell far short of his ambitious $1 trillion savings target.
• However, he has submitted a list of $9.4 billion worth of proposed spending cuts to Congress, which must now decide whether to enact them into law. President Trump has urged lawmakers to prioritize these cuts, which include reduced funding for USAID and the Corporation for Public Broadcasting (CPB), the entity overseeing PBS and NPR.
• While Musk may be departing his government role, sustained efforts will still be needed to address the nation’s fiscal challenges. We believe the growing supply-demand imbalance in bond markets is exacerbating pressure on yields, particularly for long-term bonds. Consequently, we expect the DOGE initiative to persist in promoting fiscal discipline — a critical factor in restoring confidence among bond market participants.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently paying close attention to the bond market and Nvidia’s earnings. Today’s Comment will talk about the unexpected jump in consumer sentiment and explore the factors behind this shift in optimism. We will also examine why King Charles’ speech added to US-Canada tensions and provide updates on other key financial reports. Finally, we’ll close with a summary of today’s major international and domestic data releases.

Confidence Bounce: Consumer sentiment rebounded in May, reflecting household relief amid progress in trade negotiations.

• The Conference Board’s Consumer Confidence Index significantly outperformed expectations in May, rising to 98.0 from a revised 85.7 in April. This notable increase was driven primarily by a dramatic improvement in consumer expectations, which surged 17.4 points from a historic low of 55.4 to 72.8. The Present Situation Index also showed strength, climbing from 131.1 to 135.9, suggesting households are growing less concerned about immediate recession risks.
• The recent improvement in consumer sentiment was largely driven by reduced concerns about potential tariffs fueling inflation. Notably, inflation expectations declined from 7.0% to 6.5%, reflecting growing confidence in price stability despite tariff concerns. The survey also revealed increased consumer willingness to make major purchases, with more respondents indicating plans to buy automobiles and take vacations within the next twelve months.

• While inflation expectations have moderated, lingering concerns about economic stability persist. The labor market indicators present a mixed picture. The share of respondents reporting jobs as “plentiful” edged up modestly from 31.2% to 31.8%, while those describing jobs as “hard to get” rose more significantly from 17.5% to 18.6%. This divergence suggests continued consumer skepticism about labor market strength, despite some positive signals.
• The latest Conference Board survey indicates consumers are increasingly attuned to economic shifts. While household spending is expected to remain strong if the economy continues its positive trend, a scenario where tariffs don’t spark inflation and the labor market softens could push the Federal Reserve to ease monetary policy.

The 51^st State? The king’s recent speech in front of the Canadian Parliament has brought renewed attention to the US threat of acquiring Canada.

• In his address, King Charles III emphasized that the nation faces grave threats to its democratic institutions, rule of law, and right to self-determination. Although he did not explicitly mention President Trump by name, the timing of these remarks is significant, as they coincide with the US president’s persistent efforts to bring the country under greater American influence. This speech will likely intensify ongoing debates about Canada’s relationship with its southern neighbor and the future of bilateral sovereignty issues.
• Discussions about reshaping the US-Canada bilateral relationship come as leaders from both nations seek to redefine their strategic partnership. The two countries explored collaborating on a joint missile defense system, dubbed the “Golden Iron Dome,” which would be capable of detecting, tracking, and intercepting attacks. While President Trump has threatened to charge Canada $61 billion for access to the system, its success would depend heavily on Canada’s radar coverage and Arctic airspace access.
• Rising tensions with its southern neighbor could further pressure Canadian equities. The country is already grappling with a weakening economic outlook, including slowing job growth, subdued business optimism, and a GDP contraction in Q1. A protracted dispute with its largest trading partner would only compound these challenges, adding fresh uncertainty to an already strained market environment.

• Despite escalating tensions between Canada and its largest trading partner, the country’s benchmark S&P/TSX Composite Index continues to trade near all-time highs — even outperforming the S&P 500 year-to-date. This resilience stems from the index’s heavy weighting in Energy and Financials, sectors relatively insulated from tariff risks. While economic pressures from trade disputes remain a concern, Canada’s market strength serves as a reminder that even in politically uncertain environments, pockets of opportunity can still emerge.

Japan’s Auction Blunder: Global bond yields rose following weak demand for longer-duration security issuance in Japan.

• Japan’s 40-year government bond auction drew its weakest demand since last July, despite offering higher yields. The bid-to-cover ratio — a key gauge of investor appetite — came in at 2.21, marking the second-lowest level since the pandemic. This tepid response underscores growing market reluctance to take on longer-duration risk, particularly in heavily indebted economies.
• The tepid demand for ultra-long bonds is increasing pressure on Japan’s Ministry of Finance to rebalance its issuance strategy toward shorter-dated securities. This shift would help contain long-term borrowing costs while meeting market demand, a move already showing some effect after Tuesday’s report about potential changes to the issuance mix helped ease 10-year JGB yields.
• The weak auction also presents new complications for the Bank of Japan’s normalization path. With investors showing limited appetite for duration risk, the central bank may need to adjust its balance sheet runoff plans to prevent excessive yield volatility. This development highlights the delicate policy coordination required between Japan’s fiscal and monetary authorities as they navigate an environment of rising global yields.
• The key trend we’re monitoring is the shift toward shorter-duration bond issuance among indebted developed countries. While this move helps alleviate yield pressures on longer-duration securities, it also increases the government’s exposure to rollover risk as bonds mature. This could pose challenges if unexpected shocks drive short-term rates higher. Although we do not anticipate this scenario materializing in the near term, we will closely track this dynamic.

Big Tech’s Litmus Test: The last Magnificent 7 company will report earnings this afternoon, in what could be the next major catalyst for equity markets.

• Nvidia’s upcoming quarterly earnings report represents far more than a routine corporate update — it will serve as the most consequential barometer of AI adoption and tech sector health. As the undisputed leader in AI accelerators, Nvidia has delivered eight consecutive quarters of earnings beats, transforming each report into a market-moving event that sets the tone for the entire technology ecosystem.
• The chipmaker’s unique position at the center of the AI infrastructure boom makes its financial performance particularly revealing. With every major cloud provider and tech giant racing to expand AI capabilities, Nvidia’s results will provide critical insight into whether corporate investment cycles remain intact despite macroeconomic pressures. Strong revenue growth and guidance would confirm sustained demand for AI infrastructure, while any weakness could signal broader enterprise spending pullbacks.
• Market implications extend well beyond the semiconductor sector. A bullish report could reignite the AI trade and potentially propel the S&P 500 above key psychological resistance at 6,000, as it would validate current growth expectations. Conversely, disappointing results might trigger a sector-wide repricing, particularly for high-multiple tech stocks that have benefited from the AI narrative.

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