ORLANDO, Florida, Aug 12 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Stocks around the world raced to fresh highs on Tuesday,

with investors betting that U.S. inflation is tame enough to

pave the way for a rate cut next month, although they remain on

edge over the pressure President Donald Trump continues to bear

on the Fed and other public and private sector institutions.

More on that below. In my column today I look at Latin

American currencies and ask whether their attractive "carry"

will be enough to sustain their remarkable outperformance so far

this year.

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. Trump weighing lawsuit against Fed's Powell over

renovations, White House says

2. Trump rebukes Goldman's Solomon and bank's

economics

research on tariff impact

3. Trump picks Heritage economist Antoni to lead

U.S. labor

statistics agency

4. AI startup Perplexity makes bold $34.5 billion

bid for

Google's Chrome browser

5. Treasuries have dozed off for the summer: Mike

Dolan

Today's Key Market Moves

* FX: Dollar weakens 0.5% as Fed rate cut bets

strengthen.

* STOCKS: New highs for Japan's Nikkei 225 and

TOPIX,

Australia's ASX, the S&P 500, Nasdaq and MSCI All Country

benchmarks. Russell 2000 U.S. small caps index +3%, best day

since May.

* SHARES/SECTORS: All 11 sectors in the S&P 500

rise, led

by communications +1.8%. U.S. airlines fly: United +10%, Delta

+9%. Japan's Softbank +7%, taking gains in past week to ~30%.

* BONDS: Treasury yields dip 3 bps at the short end

and

rise up to 4 bps at the long end. Curve steepest in a month.

* COMMODITIES: Oil falls, WTI futures down 1.2%

towards

$63/bbl. Demand and supply issues at play, traders also looking

ahead to Trump-Putin meeting in Alaska on Friday.

Today's Talking Points:

* Weakness in the long end of the U.S. bond market and

steepening of the yield curve. Reasons? Unease about the

apparent certainty of a rate cut next month, deepening concern

over Fed credibility and independence in the face of Trump's

pressure on Chair Jerome Powell. On Powell's potential

replacements, James Bullard and Stephen Miran both stressed on

Tuesday that Fed independence is of paramount importance.

* Deepening unease around Trump's interference in the

economic arena. He has intensified his verbal attacks on Powell

for not cutting rates, and is considering a lawsuit against him

related to renovations at the Fed's Washington HQ. He has fired

the Bureau of Labor Statistics commissioner, called for the CEO

of Intel to resign, and on Tuesday hit out at Goldman Sachs' CEO

and chief economist for the bank's analysis of the impact of

tariffs.

* Another whoosh in U.S. and global equities, which lifts

many benchmark indices to new highs. With Trump's trade war on

pause and the earnings season winding down, AI-related optimism

and rate cut hopes are underscored by Perplexity AI's

unsolicited $34.5 billion all-cash offer for Alphabet's Chrome

browser, and July's in-line CPI inflation report.

High-flying LatAm currencies may struggle to carry on

As U.S. President Donald Trump has upended many global

economic norms this year, investors have faced several

counterintuitive swings, including the dollar's plunge and

record highs in bitcoin and U.S. stocks.

Now we can add another to that list: the stellar

outperformance of Latin American currencies against the dollar.

At the start of the year Mexico's peso was thought to be

particularly vulnerable to looming U.S. tariffs, and domestic

fiscal concerns were expected to limit the Brazilian real's

upside.

But last week, one index tracking the region's currencies

against the greenback, MSCI's International EM Latin America

Currency Index, rose to the highest level since it was launched

in 2009, bringing its year-to-date gains up to 20%.

For comparison, MSCI's EM Asian currency index and global EM

currency indexes both peaked in early July, but their

year-to-date gains at that time were only around 7%. And both

have eased back since.

Bank of America analysts estimate that Latin American

currencies have appreciated more than 5% this year in real

terms, moving from 3.2% undervalued to 2.2% over-valued versus

averages over the last decade.

What accounts for this outperformance? And, perhaps more

importantly, can it continue?

CARRY ON

Price was obviously one major catalyst here. Many of these

currencies were simply cheap at the start of the year. The

Brazilian real and Mexican peso both depreciated around 20% in

calendar year 2024.

But the key factor is 'carry', the yield and interest rate

differential relative to the U.S. dollar. In nominal and

inflation-adjusted terms, the carry in Latin America is among

the highest in the world, thanks to borrowing costs in Mexico

and particularly Brazil.

The Brazilian central bank's benchmark Selic rate is an

eye-popping 15%, and even factoring in above-target inflation,

real rates and bond yields are still close to 10%. Mexico's

central bank may have cut rates 325 basis points in the past

year, but its policy rate is still more than 330 bps higher than

the U.S. fed funds rate.

When you factor in the liquidity of these two currencies

relative to most of their EM counterparts, you can see why

foreign investors have flocked to them. The real is up 14%

against the dollar this year, and the peso is up 12%. Even the

Colombian peso, facing headwinds from a renewed wave of domestic

political violence and uncertainty, is up 10% this year.

Citing high real carry, analysts at UBS and Barclays remain

positive on emerging market currencies, including Latin

America's big two. That's partly because the gap with U.S. rates

is likely to persist, especially in Brazil, even if local rates

fall, given that the Fed may soon be easing policy as well.

RETHINK

Upside potential in the second half of the year is bound to

be capped, however, precisely because of the bumper gains in the

first six months.

Emerging market local currency government bonds have

returned 12% in dollar terms this year, while EM stocks are up

16%, outpacing hard currency bonds (+7%), U.S. corporate bonds

(+5%), U.S. Treasuries (+4%), and U.S. equities (+8%), according

to Bank of America.

"This strong rally is prompting many investors to reassess

their exposure to EM rates and currencies," BofA analysts wrote

last week.

This exposure was highlighted in BofA's August global fund

manager survey released on Monday. The closely-watched poll

showed that investors' biggest rotation recently has been into

emerging markets, with a 15 percentage point jump from the month

before. Their largest overweight position now, by some distance,

is in EM assets.

Significantly - and perhaps ominously from an exchange rate

perspective - investors' biggest short position is in the U.S.

dollar.

And when considering headwinds, we can't forget tariffs.

While the vulnerabilities in Asian countries have been a key

investor focus, Brazil is also clearly in Trump's line or fire,

as it faces 50% tariffs on many of its U.S.-bound goods. Trade

talks between Brasilia and Washington have broken down

completely, with President Luiz Inacio Lula da Silva saying

U.S.-Brazil relations are at a 200-year low.

Mexico has more breathing room, having secured a three-month

truce to safeguard the U.S.-Mexico-Canada Agreement (USMCA),

stave off 30% levies, and negotiate a broader trade deal. But

until the ink dries, uncertainty will persist.

The Trump 2.0 era has taken markets on a wild ride with many

unexpected turns. Latin American exchange rates have enjoyed a

dramatic upward climb, and while this doesn't mean they'll

necessarily plummet, investors may want to buckle up.

What could move markets tomorrow?

* Chinese corporate earnings, including Tencent, Lenovo

Group

* Thailand interest rate decision

* Japan tankan survey (August)

* Japan producer prices (July)

* U.S. Fed officials on the stump: Richmond Fed President

Thomas

Barkin, Chicago Fed President Austan Goolsbee, Atlanta Fed

President Raphael Bostic

* Bank of Canada minutes

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