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McGeever: A hawkish Fed can cause the biggest "pain trades" on markets.
Financial markets are in limbo as the first half of this year ends. They're waiting to see if the global trade deal kaleidoscope will come together - or not - after July 9 when Washington's "reciprocal" tariffs expire. Which trades are most at risk if investors get caught off guard? Today's market is in a state of suspended animation. This is an incredibly bullish situation. The U.S. forecasts for growth are increasing, S&P earnings growth estimates are running at 14% next year, and corporate deal-making has picked up. World stocks are also at record highs. It seems that the uncertainty following President Donald Trump’s "Liberation Day", April 2, tariffs is a distant past. The relief rally raged for almost three months and only took a short pause during the 12-day conflict between Israel & Iran. Some might even say it's too rosy. What will be the "pain trades", if we see a decline? Unsurprisingly, the major pressure points occur in asset classes and on markets where sentiment and positioning are heavily skewed in one direction. A sudden price change can cause too many traders to rush out of the market at once. Bank of America's global fund manager monthly survey is a good way to identify positions that are overloaded. According to the Bank of America's June survey, long gold is the most popular trade right now (according 41% of respondents), followed by long "Magnificent Seven Tech Stocks" (23%), and then short U.S. Dollar (20%). These three trades are popular because they have proven to be highly profitable. The "Mag 7", a basket of Nvidia shares, Microsoft, Meta, Apple and Alphabet, as well as Amazon and Alphabet, accounted for more than half of S&P 500’s 58% return over two years in 2023-2024. The Roundhill "Mag 7" ETF, which is equal-weighted, has risen 40% in the past year. This week, the Nasdaq 100, a market index that includes these seven companies, reached a new high. Gold prices have nearly doubled over the past two and a half years. They reached a record-breaking $3,500 per ounce in April. The dollar has fallen 10% in this year and is on course for its worst half-year since the establishment of the free-floating rate system more than 50 year ago. Slash and... BURN? These three positions are a derivative of a fundamental bet. The belief that the Federal Reserve is likely to cut U.S. rates substantially over the next 18-month period, which would turn all of these positions into moneymakers. Rates futures markets are increasing their bets for lower rates despite the Fed's revised projections of economic growth last week being notable for their hawkish tone. This is largely because several Fed officials have made dovish remarks and oil prices have fallen sharply. The traders now predict 125 basis point rate cuts before the end of next. Morgan Stanley's economists are even more pessimistic, predicting no change in the forecast for this year and 175 basis point cuts for next year. This would bring the Fed funds rate down to between 2.5% and 2.75%. A reduction in borrowing costs is especially beneficial for companies with high growth potential, such as Big Tech. In theory, low rates would also be good for gold as it is a non-interest bearing asset. On the other hand, it is difficult to imagine a scenario where the economy continues to grow, boosting equity performance, and the Fed also cuts rates by 175 basis points. A Fed that eases at this speed and scale would almost certainly be trying to quell a raging fire in the economy, which is most likely a recession or severe slowdown. Risk assets may not necessarily crash in this environment, but overextended positions will be exposed. This isn't a first for investors to have bet on Fed cutbacks in the last three years. However, we haven't seen a major crash as a consequence. The markets have fared better than most observers predicted, and reached new highs. If "pain trading" does emerge in the second part of the year, this will be due to one particular sore spot: A hawkish Fed. You like this column? Open Interest (ROI) is your new essential source of global financial commentary. ROI provides data-driven, thought-provoking analysis. The markets are changing faster than ever. ROI can help you keep up. Follow ROI on LinkedIn, X.
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US announces it has reached an understanding with China to accelerate rare earth exports
A White House official announced on Thursday that the United States and China have reached an agreement on how to expedite the shipment of rare earths to the United States. This comes amid efforts to resolve a trade dispute between the two world's largest economies. China agreed to remove non-tariff measures imposed on the United States from April 2 during talks in Geneva in May, although it is unclear how certain of these countermeasures would be removed. China has added rare earths as part of its response to the U.S. tariffs announced recently by President Donald Trump. A White House official announced on Thursday that "the administration and China have agreed to an additional agreement for a framework in order to implement the Geneva Agreement". Officials said that the understanding was "about how to expedite rare earth shipments into the U.S. once again". Bloomberg quoted U.S. Commerce Sec. Howard Lutnick as saying: "They will deliver rare earths" and "we will take down our countermeasures" once they have done that. The Chinese embassy in Washington has not responded to a comment request immediately. Reporting by Nandita BOSE and Steve Holland, writing by Costas PITAS; editing by Chris Reese
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DNOW acquires MRC Global for $1.5 billion in all-stock deal
DNOW, a supplier of industrial and energy products, announced on Thursday that it will buy MRC Global for $1.5 billion in stock plus debt. The combined company will have over 350 service and distributor locations in 20 countries. It will serve customers from the gas utility sector, upstream, middlestream and downstream. The acquisition is part of the ongoing consolidation within the oilfield service and industrial supply sectors, where companies are combining to increase geographic reach, expand product offerings, and improve operational efficiency. MRC Global distributes pipe, fittings and automation products primarily to the energy, utility, industrial and industrial markets. According to calculations, MRC Global shares will be exchanged for 0.9489 DNOW shares, resulting in a deal value per share of $13.85 - a 6.8% premium. DNOW shares also rose 1.9% in extended trading. The deal will close in the fourth-quarter of 2025. DNOW shareholders are expected to own 56.5%, and MRC shareholders 43.5%, of the new entity. The deal is expected to save the companies $70 million annually in three years due to supply chain efficiency, system integration, and cost savings for public companies. The deal will also be expected to increase adjusted earnings per share within the first year of closing. DNOW CEO David Cherechinsky is the new leader of the combined company. It will continue to be operated under the DNOW brand and will remain headquartered in Houston. The DNOW board will be expanded to 10 members by the addition of two MRC Global directors. (Reporting by Arunima Kumar in Bengaluru; Editing by Mohammed Safi Shamsi)
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UN Climate Budget to be Increased by 10%
The U.N. Climate Body's budget will be increased by 10% over the next two-year period. This is a positive step for the organization, as it shows a willingness to collaborate on the issue of climate change. China's contribution has also been raised. Nearly 200 countries, from Japan to Saudi Arabia to small island countries like Fiji, reached a deal at the U.N. Climate Negotiations in Bonn. This agreement came despite significant funding cuts in other U.N. organizations, which were triggered by U.S. cutting its contributions and political pushback against ambitious climate policies by European countries. The countries agreed on a budget core of 81.5 millions euros for the United Nations Framework Convention on Climate Change over 2026-2027. This is an increase of 10% from 2024-2025. The core budget is funded through government contributions. China's contribution has been increased to reflect the economic growth of the country. China, which is the second largest economy in the world, will cover 20% of the budget. This is up from 15%. Only the United States as the largest economy in the world received a higher share of 22%. Donald Trump, however, resigned from the U.N. Paris Climate Agreement and stopped international climate funding. Bloomberg Philanthropies pledged to cover U.S. contributions to UNFCCC budget. The U.S. didn't attend the U.N. Climate talks in Bonn this week, Germany, where the budget has been approved. UN climate chief Simon Stiell welcomed this increase as a "clear signal that governments still see U.N. convened climate collaboration as essential, even during difficult times." UNFCCC facilitates annual climate negotiations between countries, and assists in implementing agreements made. This includes the 2015 Paris Agreement which committed nearly all nations towards limiting global warming. In recent years the organization has suffered a severe financial shortfall due to major donors such as China and the U.S. not paying on time. This led the organization to reduce costs, including canceling some events. UNFCC running costs and staffing are lower than other U.N. agencies facing funding cuts. For example, the U.N. Trade and Development Agency's 400 staff. According to a memo, the U.N. Secretariat is planning to cut its budget of $3.7 billion by 20%. (Reporting and editing by Toby Chopra; Reporting by Kate Abnett)
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Netanyahu expects to expand peace talks after Iran war
Benjamin Netanyahu, Prime Minister of Israel, said that Israel's war against Iran was a chance for peace and his country shouldn't waste it. In a press release, Netanyahu stated: "This victory offers an opportunity to dramatically expand peace agreements." This is something we are working with great enthusiasm on. "Along with the release of hostages and defeating Hamas, a window of chance must not be missed." We can't waste a single moment." Israel Hayom, citing an anonymous source, reported earlier in the day that Netanyahu and U.S. president Donald Trump had agreed, in a telephone call this week, to end the Gaza war quickly, possibly within two weeks. Israel Hayom stated that the agreement could include an expansion of the Abraham Accords between Israel and its Arab neighbours, including Saudi Arabia and Syria. The Prime Minister's Office declined to comment on Israel Hayom. The U.S. brokered Israel-Iran truce announced by Trump has raised hopes among Palestinians that the 20-month-long war in Gaza, which has ravaged the area and forced most of its residents to flee their homes with widespread malnutrition, will soon come to an end. Netanyahu stated on Sunday that he expects more countries to sign the Abraham Accords with a weaker Iran. Netanyahu said to reporters at the time, "We have broken up the axis." This is a big change, and Israel is becoming more prominent not only in the Middle East, but around the globe. This is a major shift. "We will have a new, bright future of security, prosperity, hope, and peace." Reporting by Howard Goller and Maayan Libell; editing by Andrew Cawthorne
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Brazil's power regulator warns that budget cuts could lead to a shutdown.
Sandoval Feitosa said that Aneel, Brazil's regulator of power, is in a serious budget crisis. He urged the government to release money to keep the agency's vital operations running. Why it's important Aneel's potential closure would coincide with government efforts to reduce spending in order to meet fiscal targets and could compromise the regulatory oversight of Latin America's biggest power sector. Aneel is primarily responsible for regulating Brazil’s electricity generation, transmission, and distribution. It also oversees concessions and implements government policies, and establishes tariffs. By the Numbers According to Feitosa, Aneel has had its budget cut to 117 millions reais (about $21,28 million), from an initial 155 million. This is because the government implemented spending containment measures. The agency initially requested 240 millions reais for its operational requirements. KEY QUOTE Feitosa, a reporter in Rio de Janeiro, told reporters that the agency would only be able function every day until 2 pm because of these cuts. Due to financial constraints, he noted that Aneel has already cut staff, suspended call center operations, and prevented inspections. Feitosa stated that this is the biggest budget cut Aneel had ever seen in its history. What's Next? Feitosa has assured that Aneel’s analysis of the renewals of distribution concessions as well as auctions for power will not be affected by the current budget crisis. The agency is waiting for a government decision on its funding request.
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Nour News reports that the damaged unit of Iran's South Pars Refinery is now back in operation.
Nour News, the Iranian state news agency, reported that a damaged unit of South Pars refinery Phase 14 has been returned to service. Israel had struck the refinery in its first attack on Iran's oil sector. South Pars is the largest gas field in the world. It is located off the coast of Iran's Bushehr Province, which is the southernmost province. This gas field is responsible for a large part of the gas produced by the country. Iran is the third largest gas producer in the world after the United States of America and Russia. The agency said that gas production did not stop and the unit damaged was repaired within 10 days. The Israeli strike on June 14 caused an fire in one of four Phase 14 units. It has since been put out. Israel began an airstrike against Iran, killing scientists and commanders on June 13, and bombing nuclear facilities. It claimed it was trying to stop Tehran from building atomic weapons. Donald Trump, the U.S. president, announced a ceasefire on Monday between Israel and Iran after a 12-day aerial war. Reporting by Dubai Newsroom. Yomna ehab is the author. (Editing by Andrew Cawthorne, Mark Potter and Mark Potter).
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Dollar hits 3-year low and stocks hit new record amid Fed concerns
The dollar fell to its lowest level in more than three years, even though global stocks hit their third all-time high on Thursday. Markets are also growing increasingly concerned about the independence of the Federal Reserve. The U.S. Dollar Index was down by nearly 0.5% for the session, and over 10% on an annual basis. If the trend continues in the coming days, it will be the biggest drop in the first six months since the beginning of the free-floating currency era in the early 1970s. Wall Street's major indexes are trading higher. The benchmark S&P 500, and Nasdaq are nearing records. The Dow Jones Industrial Average increased by 0.74%, the S&P 500 by 0.66% and the Nasdaq Composite by 0.73%. European shares ended up 0.09%. MSCI's global stock index rose 75%, to 908.96. This was a record high for a third consecutive session. According to a Wall Street Journal article, President Donald Trump is considering replacing Chair Jerome Powell in the coming months. His term ends next May. Powell just finished two days of testimony before the U.S. Congress. He said that he would be cautious in considering any further rate reductions, as he expects Trump’s tariffs to cause prices to increase this summer. Wasif Latif is the chief investment officer of Sarmaya Partners, a New Jersey-based firm. He said that a Trump appointment to a shadow Fed chairman will likely undermine investor confidence in its independence and contribute to the weakness of the dollar. Latif explained that the market is aware that Powell will leave the stage sooner or later and that the next appointment would likely be someone who's a bit more dovish, or politically motivated. "And the markets are saying that the next chair is likely to be more receptive to large cuts than Powell was and I think this is part of the reason why the dollar is weakening and gold is reflecting it." Overnight, the Nikkei in Tokyo rose 1.65%, reaching its highest level since last January. MSCI's Asia-Pacific share index outside Japan also finished higher. The euro has reached its highest level against the US dollar since 2021. Trade tariff talks with Washington are expected to begin next week ahead of Trump's July 9 global deadline. The dollar fell to its lowest level in a decade against the Swiss Franc, at 0.79855. The dollar was also down by 0.73% at 144.195 yen against. After its decline this year, the dollar index, which compares the U.S. dollar to six other currencies, is now at its lowest point since March 2022. Michael Metcalfe, State Street's chief economist, said: "The dollar has struggled to appreciate in virtually any market regime." He added that the US dollar was now at its lowest level since the COVID Pandemic. The CME FedWatch tool shows that traders now price in nearly 25% of the chance that the Fed will cut rates at its meeting on the last day of July, up from 12.5% the previous week. The yield on the benchmark U.S. 10 year notes dropped 1.6 basis points, to 4.277%. The yield on the two-year U.S. Treasury, which moves typically in line with expectations of interest rates, fell 2.9 basis points to 3.75%. This was its lowest level since seven weeks. Germany's benchmark, which is used in Europe for comparisons, has risen by 0.4 basis points. The oil prices are on course for a second consecutive day of gains following their sharp drop after the Trump-brokered truce between longtime Middle East enemies Israel and Iran early this week. Trump also announced that he would hold talks with Iran to ask for a commitment to curtail its nuclear ambitions. Brent crude futures climbed 1.2% to 68.49 a barrel, while U.S. West Texas Intermediate (WTI), gained 1.43% at $65.85. Gold fell 0.2% to $3325.54 per ounce.
Spain's utilities tax suffers defeat in parliament
Spanish lawmakers on Thursday voted to eliminate a short-lived tax on energy business in a. problem for the minority government that still plans to reimpose. the levy by decree, according to the spending plan minister.
The tax, of 1.2% for companies with a turnover of at least 1. billion euros, is among the hurdles the government needs to. clear before it can start negotiating a much-delayed spending plan costs. for next year, but its partners to the left and right are at. chances on the problem.
We will authorize (a decree enforcing the tax) on Monday at. the last cabinet conference of the year, Budget Minister Maria. Jesus Montero informed reporters, including that it was required to. accomplish a larger arrangement on fiscal reform and the budget plan.
The decree would enter into force from Jan. 1, but will require. to be verified by parliament at a later date in order to remain. valid, which might be challenging to attain.
Catalan separatist party Junts and Basque nationalists PNV. have actually argued that such a levy would impact financial investments. On. Thursday, they joined the conservative opposition Individuals's Celebration. in a change to end the tax, a mainly symbolic gesture as. the current levy just lasted until the end of the year.
Left-wing Podemos stated extending the tax and making it. long-term is essential for them to begin spending plan negotiations, while. Basque leftist party Bildu said the government had actually agreed with. them and other leftist celebrations to extend the levy.
Utilities have actually cautioned that extending the tax would. jeopardise 30 billion euros ($ 31.6 billion) in renewable resource. investments.
The government had vowed to work on an irreversible windfall. tax or at least extend the short-term one by another year in. exchange for Podemos support for a wider tax strategy authorized last. month.
The momentary tax was produced in 2022 and aimed at relieving. expense of living pressures for normal Spaniards as banks. benefited from high rate of interest and energy companies got from. a rise in energy rates following the war in Ukraine.
(source: Reuters)