ORLANDO, Florida, June 26 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

The dollar slid and stocks surged on Thursday as investors

ramped up bets that U.S. interest rates will soon be cut, after

President Donald Trump, in his latest attack on Fed Chair Jerome

Powell, reportedly said he may name his replacement early.

In my column today I look at where the "pain trades" for

investors may lie in the second half of the year. More on that

below, but first, a roundup of the main market moves.

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 decision on Fed not imminent, source says

2. Investors shore up defences against another

August

market rout

3. Wall Street forecasts windfall for big U.S. banks

from

Fed plan to ease leverage rule

4. BoE echoes central banks' long bond sensitivity:

Mike

Dolan

5. EU leaders meet to decide on whether to back

quick U.S.

trade deal or seek better terms

Today's Key Market Moves

* World stocks hit a fresh record peak, the S&P 500

and

Nasdaq both get to within a whisker of their all-time highs.

* Dollar index falls to a 3-year low, the euro and sterling

hit

highest since 2021, the Swiss franc hits a decade high.

* Soaring FX caps stocks in Europe, where indices lag U.S.

peers.

In Asia, Japanese, Chinese stocks hit 5-month and 7-month highs,

respectively.

* U.S. Treasury yields fall to lowest since early May, also

pressured by weak U.S. economic data. Curve bull steepens.

* Platinum rises another 4%, now up 34% this month -

its

best month in nearly 40 years and second best ever.

Markets 'run it hot'

Juice the economy. That seems to be the Trump

administration's broad plan, which will be achieved in time by

tax cuts, deregulation, and loose fiscal policy. And loose

monetary policy. Most definitely loose monetary policy.

Pressure from the White House on the Fed to cut interest

rates is nothing new. The president has unleashed several verbal

tirades towards Chair Jerome Powell for not doing so, branding

him "very stupid", "very dumb" and of "low IQ".

Powell's term as chair expires in May next year, and he

insists he can't be fired. So Trump is now considering naming

his replacement early, who could operate as a "shadow" Fed

chair, undermining Powell's influence.

It remains to be seen how effective or even viable this

would be. But the fact it's being floated is pouring fuel on

market moves that were already beginning to catch fire - the

dollar is tumbling, Fed rate cut bets are being ramped up,

stocks are flying, and "Big Tech" is getting its mojo back.

The dollar on Thursday slumped to its lowest in more than

three years against a basket of major currencies - performing

especially poorly against European currencies - and is on track

for its worst first half of any year in over half a century.

The Trump administration will likely be quite happy with the

way markets are reacting - a more export-competitive dollar,

lower short-term yields, and higher stocks. And if you look

further out, higher nominal growth and above-target inflation to

inflate away the debt.

The danger is these moves snowball and the dollar goes into

a more rapid freefall, triggering widespread market dislocation.

But we're not there yet, and investors are running with it.

Hawkish Fed could inflict markets' biggest 'pain trades'

As the first half of the year closes, financial markets

are in limbo, waiting to see how the kaleidoscope of global

trade deals will - or won't - come together after July 9, when

Washington's pause on its "reciprocal tariffs" expires. But if

investors are wrong-footed, which trades will be the most

vulnerable?

The state of suspended animation in today's markets is

remarkably bullish. U.S. growth forecasts are rising, S&P 500

earnings growth estimates for next year are running at a punchy

14%, corporate deal-making is picking up, and world stocks are

at record highs.

The uncertainty immediately following President Donald

Trump's April 2 "Liberation Day" tariffs seems a distant memory.

The relief rally has ripped for nearly three months, only taking

a brief pause during the 12-day war between Israel and Iran.

It's a pretty rosy outlook, some might say too rosy. If we

do see a pullback, what will be the biggest "pain trades"?

The major pressure points are, unsurprisingly, in asset

classes and markets where positioning and sentiment are most

overloaded in one direction. As always with crowded trades, a

sudden price reversal can push too many investors to the exit

door at once, meaning not all will get out in time.

To identify the most overloaded positions, it's useful to

look at the Bank of America's monthly global fund manager

survey. In the June survey, the top three most-crowded trades

right now are long gold (according to 41% of those polled), long

"Magnificent Seven" tech stocks (23%), and short U.S. dollar

(20%).

This popularity, of course, means these three trades have

been highly profitable.

The "Mag 7" basket of Nvidia, Microsoft, Meta, Apple,

Amazon, Alphabet and Tesla shares accounted for well over half

of the S&P 500's 58% two-year return in 2023 and 2024. The

Roundhill equal-weighted "Mag 7" ETF is up 40% this year, and

the Nasdaq 100 index, in which these seven stocks make up more

than half of the market cap, this week hit a record high.

Meanwhile, the gold price has virtually doubled in the last

two-and-a-half years, smashing its way to a record high $3,500

an ounce in April. And the dollar is down 10% this year, on

track for its worst first half of any year since the era of

free-floating exchange rates was established more than 50 years

ago.

SLASH AND ... BURN?

In some ways, these three trades are an offshoot of one

fundamental bet: the deep-rooted view that the Federal Reserve

will cut U.S. interest rates quite substantially in the next 18

months, a scenario that would make all these positions

money-spinners.

Even though the Fed's revised economic projections last week

were notable for their hawkish tilt, rates futures markets have

been upping their bets on lower rates, largely due to dovish

comments from several Fed officials and a sharp fall in oil

prices. Traders are now predicting 125 basis points of rate cuts

by the end of next year.

Economists at Morgan Stanley are even more dovish,

forecasting no change this year but 175 basis points of cuts

next year. That would take the Fed funds range down to

2.5%-2.75%.

Lower borrowing costs would be especially positive for

shares in companies that can expect high future growth rates,

like Big Tech. Low rates are also, in theory, good for gold, a

non-interest-bearing asset.

But, on the flip side, it's difficult to construct a

scenario in which the economy is chugging along, supporting

equity performance, while the Fed is also slashing rates by 175

bps.

Easing on that scale and at that speed would almost

certainly signal that the Fed was trying to put out a raging

economic fire, most likely a severe slowdown or recession. While

risk assets may not necessarily collapse in that environment,

over-extended positions would be exposed.

Granted, this isn't the first time investors have banked on

Fed cuts in the past three years, and we have yet to see a major

blow-up as a result. Markets have handled "higher-for-longer"

rates much better than many observers warned, soaring to new

highs in the process.

Still, if "pain trades" do emerge in the second half of the

year, it will likely be because of one sore spot: a hawkish Fed.

What could move markets tomorrow?

* Japan retail sales (May)

* Japan unemployment (May)

* Japan Tokyo inflation (June)

* Japan Softbank AGM

* Euro zone sentiment indexes (June)

* U.S. PCE inflation (May)

* U.S. University of Michigan consumer sentiment, inflation

expectations (June, final)

* Cleveland Fed President Beth Hammack and Fed Governor Lisa

Cook

participate in 'Fed Listens' event

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