LONDON, May 8 (Reuters) - What matters in U.S. and

global markets today

By Mike Dolan, Editor-At-Large, Financial Industry and Financial

Markets

The spotlight hit Britain on Thursday as U.S. President Donald

Trump's 'major trade deal' announcement looks set to provide a

major relief for UK exporters, just as the Bank of England is

set to cut interest rates.

I'll get into all the market news below, and, for today's deep

dive, I'll explain why Europe may be better prepared to absorb a

deluge of global investment flows than many assume.

Today's Market Minute

* The Federal Reserve held interest rates steady on Wednesday

but said the risks of higher inflation and unemployment had

risen, further clouding the U.S. economic outlook.

* Trump is expected to announce a trade deal between the United

States and Britain on Thursday, the New York Times reported on

Wednesday.

* Ukraine is starting to consider a shift away from the U.S.

dollar, possibly linking its currency more closely to the euro

amid the splintering of global trade and its growing ties to

Europe, Central Bank Governor Andriy Pyshnyi told Reuters.

* Sentiment in the oil market has soured in recent weeks, but

looking at current conditions on the ground - and refiners'

profit margins - one would be forgiven for thinking that the oil

market is doing extremely well. What gives? Reuters' columnist

Ron Bousso explores this discrepancy.

* Concern is mounting over just how big a hit the Chinese

economy is going to take from the trade war with the United

States, but so far the commodity most at risk - iron ore - is

seemingly unaffected. Reuters' columnist Clyde Russell explains

why in his latest piece.

UK eyes 'major trade deal'

A British official said the U.S. and UK were working to

agree on lower tariffs for steel and autos, two sectors that

have been hit by 25% U.S. levies. In return, Britain is likely

to agree to lower its own tariffs on U.S. cars and cut a digital

sales tax that affects U.S. tech groups.

The status of a 10% "baseline" tariff imposed by Trump on

most countries including Britain remained unclear.

Awaiting a widely-expected quarter point UK rate cut later

today, sterling appeared to shrug off the anticipated

trade announcement. But the FTSE 250 index of

domestically facing mid-cap stocks rose almost 1% on the news to

its highest point since late February.

Meanwhile, the Federal Reserve chose not to change interest

rates on Wednesday, a decision that was widely expected. The

U.S. central bank flagged the high level of uncertainty ahead,

arguing that it made it challenging to make any confident

changes to policy or guidance.

Embattled Fed Chair Jerome Powell highlighted the risk that

trade upheaval could lift both unemployment and inflation,

creating tensions in the Fed's dual mandate on jobs and price

stability.

"I don't think we can say which way this will shake out,"

Powell said.

But Wall Street stocks ended higher nonetheless,

emboldened by hopes that the week ahead will see at least some

easing of planned U.S. tariffs amid expected deals with Britain

and others as well as weekend talks in Switzerland with China.

U.S. stock futures extended those gains overnight

along with a broad advance in European and Asian bourses.

Although the first-quarter U.S. earnings season has been

sideswiped by suspended outlooks and foggy guidance due to the

looming tariffs, estimated annual profit growth for S&P 500

companies during the first three months is running at 14% -

almost twice what it was on April 1 and above the 12% forecast

for the first quarter made at the start of the year.

Elsewhere, US Treasury yields were steady to a

touch higher after the Fed meeting, with $25 billion of 30-year

bonds up for auction later on Thursday.

The dollar index was slightly firmer, with the euro

flirting with its lowest level in almost a month and

China's offshore yuan slipping after this week's latest

monetary easing from the People's Bank of China.

Elsewhere, central banks in Sweden and Norway kept their

interest rates on hold.

Regional markets were unnerved by the escalating conflict

between India and Pakistan.

Trading was halted for an hour on Thursday at the Pakistan

Stock Exchange after the benchmark index plunged as much

as 6% following reports of drones being shot down in major

cities including Karachi and Lahore.

That came a day after Indian strikes on multiple targets in

the country fanned fears of a larger military conflict between

the nuclear-armed neighbours.

The Indian rupee, equities and bonds also

weakened in late afternoon trading there.

Europe braces for transatlantic capital reverse

Europe may be better prepared to absorb a seismic shift in

global investment flows than many assume, as a number of

regulatory twists are set to bolster euro market depth.

Trump's unilateral redrawing of world trade rules is raising

the question of whether giant U.S. capital surpluses will have

to unwind if tariff hikes succeed in squeezing America's

persistent trade deficits.

For macro-economists, those are two sides of the same coin.

If the administration succeeds in rebalancing the U.S.

economy, defusing dollar over-valuation and regaining the

country's manufacturing edge, that will have to involve some

shrinkage of the roughly $26 trillion U.S. Net International

Investment Position, the excess of foreign capital in U.S.

assets over U.S. investments overseas.

During March and April, there was considerable concern that

foreign capital flight was indeed underway as U.S. stocks, bonds

and the dollar fell in tandem. The sell-off was driven by

mounting anxiety about the potential for a self-inflicted U.S.

recession or stagflation, fraying U.S. institutions and the

dollar's role as a safe haven.

At the same time, the euro and euro stocks soared, in part

due to Germany's equally dramatic new spending and borrowing

plans that reignited hopes for longer-term growth and an

expanded pool of high-quality debt assets.

But doubts lingered about whether Europe's smaller and

shallower capital markets could ever accommodate a repatriation

of the deluge of savings that have poured into U.S. assets over

the past decade-plus. Some $7 trillion in European savings has

flocked to Wall Street equities since 2012.

Indeed, many reckon American markets attracted such vast

sums as much because of their unrivalled scale and liquidity as

any 'exceptional' American economic or corporate performance per

se. In turn, the euro's smaller and more fragmented markets have

raised doubts about whether the currency could ever challenge

the dollar's wide usage.

NOT JUST 'NICE TO HAVE'

But this relative imbalance is not set in stone, especially

if Europe's markets develop apace alongside a push to meet

post-pandemic and Trump-linked challenges with a more

"high-pressure" economy and industrial policies.

TS Lombard's Davide Oneglia argues the Trump trade shock has

underlined the urgency of last year's report from former

European Central Bank chief Mario Draghi on measures that the EU

needs to pursue to keep up with bigger economic rivals.

And, evidenced in part by Germany's fiscal bazooka this

year, EU leaders are now acutely aware that Draghi's demands

were not just 'nice to haves', including financial market

reforms.

Oneglia highlights Draghi's conclusion that some 80% of the

money required for transformation of European competitiveness

will need to be financed by the private sector.

And on that score, some progress appears to be underway.

"EU policymakers finally appear to be getting serious about

integrating and deepening European financial markets," Oneglia

wrote this week.

BROADER, DEEPER, WIDER

Oneglia pointed to two specifics that should help expand

long-term institutional investment across European markets.

First is reform of "Solvency II" regulatory rules governing

the 10 trillion euro insurance industry. This could free up

additional capital and allow a wider pool of public and private

equity to be invested in the continent.

The second measure is a "wildly underreported" push to

channel large European private savings into capital markets by

developing a more expansive private pension industry across the

region.

On the latter, the European Commission this year rebranded

the old Capital Markets Union as the Savings and Investment

Union. The private pension push accompanying this is likely to

involve requirements for things like auto-enrolment in pensions

and targets for national implementation as soon as this year.

In that spirit, Germany's new government has also made

developing private pensions a priority.

Why this matters is that European households currently hold

about a third of their savings in cash and deposits, more than

twice the share U.S. households hold. And German savers are the

most extreme, with more than 40% of their financial wealth in

cash.

Channeling these savings into institutional investment funds

will go a long way to deepening European markets.

Of course, a crush of untapped savings and returning

overseas investment could flood European markets too quickly,

saddling the region with an overvalued currency - the very issue

America has fretted about for the past decade.

Be careful what you wish for, as the old saying goes.

"Exorbitant privilege" may not be all it's cracked up to be in

that scenario.

Europe has to decide how to manage those investment flows as

well as what to do with the finance.

Chart of the day

The Bank of England is expected on Thursday to nudge its

main interest rate below the Federal Reserve's key rate for the

first time since August. This will restore the U.S. rate premium

that's existed in all but a brief period over the past decade.

Markets now expect three more cuts from both central banks over

the remainder of the year.

However, after a fresh wobble in British government bond

yields earlier this year, 10-year gilt yields are now almost 20

basis points above U.S. Treasury equivalents, though that gap

has roughly halved in the past month.

Today's events to watch

* Bank of England policy decision, press conference and

monetary policy report

* U.S. weekly jobless claims, Q1 productivity and unit labor

costs

* Bank of Canada governor Tiff Macklem speaks

* US corporate earnings: ConocoPhilips, Paramount Global ( PARAA ),

News Corp ( NWSA ), Warner Bros Discovery ( WBD ), Expedia ( EXPE ), Match, Molson Coors ( TAP/A ),

Sempra ( SRE ), Tapestry, Alliant, Insulet ( PODD ), Viatris ( VTRS ), Microchip

Technology ( MCHP ), Mckesson, Monster, Akamai ( AKAM ), Solventum, TKO, Federal

Realty, Epam ( EPAM ), Kenvue ( KVUE )

* U.S. Treasury sells $25 billion 30-year bonds

Opinions expressed are those of the author. They do not reflect

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