A look at the day ahead in U.S. and global markets from Mike

Dolan

The dramatic switch to U.S. small cap stocks over the past week

went into overdrive on Tuesday as interest rate cut and election

fever combine, but world markets more broadly are getting nervy

of the prospect of Donald Trump's return to the White House.

In a series of interviews around this week's Republican

convention, Trump set out several of his policy priorities

around tax cuts, tariff rises and foreign policy.

The most jarring comment overnight was his assertion that

Taiwan should pay for its own defence - which knocked Taipei's

benchmark index down about 1% - but it's just one of

series of policy directions that's starting to feed market

pricing.

Taiwan's chipmaking giant TSMC plunged 3%, the

wider Taipei benchmark was down about 1% and chip stocks

elsewhere were knocked back. Gold prices rose.

Caught in the slipstream of this chipmaker hit and the

week's Wall St rotation, global megacaps such as Nvidia ( NVDA )

are set to fall for the third day.

It's a different picture for small caps however.

The Russell 2000 of soared 3.5% on Tuesday - its

fifth straight day of gains greater than 1%, its longest winning

streak since April 2000 and highest level since January 2022.

Jumping more than 10% over the past week, the index of

mostly domestic-facing smaller business is now up almost 12% for

the year to date - narrowing the gap with the S&P500's 19% for

2024 so far and the 21% rise in the Nasdaq 100.

Adjusting for the outsized weightings of the megacaps, the

equal-weighted S&P500 is now up almost 9% for the

year.

And futures suggest the Russell will hold those

gains later.

The gist of the argument behind the shift to better valued

small caps from the pricy tech bellwethers is both stepped up

interest rate cut speculation but also the tax, tariff and

reshoring lean of a possible Trump return - now that his lead in

betting markets for a November win has surged to more than 70%.

That home bias has been absorbed pretty well across the

board by the big stock indexes so far, with the S&P500 also up

marginally to new highs on Tuesday.

VOLATILITY CREEPING BACK

But there are growing signs of volatility and disruption

creeping back in - with S&P500 futures down almost 1%

ahead of the Wednesday's bell and Nasdaq futures off 1.3%

.

The VIX volatility gauge was at its highest in more

than a month.

The economic backdrop to the stock market churn seems less

worrying.

Resuming U.S. disinflation still has futures fully pricing a

first Fed rate cut in September and 65 basis points of rate

cuts by year-end. Canada's surprisingly soft June inflation

update reinforced that view.

The June U.S. retail sales readout was better than expected

and the Atlanta Fed's 'GDPNow' real time growth monitor nudged

up to 2.5% this week from 2% last week.

U.S. industrial production numbers and housing starts top

the diary later and the earnings season starts to broaden out

beyond the big banks.

Overseas, UK headline inflation came in on target at 2% -

though that was slightly above the 1.9% forecast and services

inflation also picked up steam.

Sterling rose as money markets dialed back the

chances of a Bank of England rate cut next month to as little as

a one-in-four chance.

Britain's new Prime Minister Keir Starmer will set out his

first package of proposed laws on Wednesday, fleshing out how he

will honour his election-winning pledge to rebuild the country

after years of weak economic growth and political turmoil.

Key developments that should provide more direction to U.S.

markets later on Wednesday:

* U.S. June industrial production, June housing starts

* US corporate earnings: Johnson & Johnson, Northern Trust, US

Bancorp, Citizens Financial, Discover Financial, Synchrony

Financial, United Airlines, Steel Dynamics, Prologis, Kinder

Morgan, Crown Castle, Equifax, Elevance Health

* Federal Reserve releases Beige Book of economic conditions;

Fed Board Governor Christopher Waller, Richmond Fed President

Thomas Barkin and Kansas City Fed chief Jeffrey Schmid all speak

* New UK government sets out its legislative plans for the

coming parliament in so-called King's Speech

* German Finance Minister Christian Lindner holds news

conference on 2025 draft budget

* US Treasury auctions $13 billion of 20-year bonds

(Editing by Bernadette Baum)