ORLANDO, Florida, April 28 (Reuters) -

TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Glass half empty again

The optimism that infused Asian and European markets on

Monday evaporated as the global trading session progressed, with

U.S. investors taking a 'glass half empty' view on the current

global uncertainty surrounding tariffs and outlook for economic

growth.

Wall Street's underperformance ended up being pretty

marginal, but there is little doubt that a re-rating of U.S.

assets is underway. More on that below, but first, a roundup of

today's moves on world markets.

I'd love to hear from you, so please reach out to me with

comments at [email protected]. You can also

follow me at @ReutersJamie and @reutersjamie.bsky.social.

If you have more time to read today, here are a few articles

I recommend to help you make sense of what happened in markets

today.

1. After 100 days under Trump, investors reassess

the

allure of 'brand USA'

2. China holds off on new stimulus, shows composure

in US

trade war

3. Unexpected euro surge adds to Europe Inc's tariff

misery

4. Amid Trump tariffs, China's trade and economy

tsar steps

into spotlight

5. Euro zone economy facing dark future, ECB

policymakers

warn

Today's Key Market Moves

* Wall Street's big indexes sink as much as 1% intraday but

recover by the close of trade. The Dow ends up 0.3%, the S&P 500

is essentially flat, and the Nasdaq dips 0.1%.

* U.S. tech stocks fall 0.2%; real estate and energy lead

the

gainers, rising 0.8% and 0.6%, respectively.

* India's BSE Sensex rises 1.3% to a fresh high for

the

year above 80300 points.

* Britain's FTSE 100 rises for 11th consecutive

session,

its longest winning streak since December 2019.

* The yen is the biggest G10 FX gainer, rising more than 1%

to 142

yen per dollar.

* Sterling jumps 0.9% and matches last September's high of

$1.3434. If that breaks, sterling is at levels last seen more

than three years ago.

* U.S. bond yields fall by as much as 7 basis points at the

short

end, delivering a bull steepening of the curve.

* The 'risk off' tone in U.S. trading lifts gold nearly 1%

back up

toward $3,350/oz.

* Oil slides, Brent crude futures losing 1.5% to close at

$65.86/bbl

Play it safe, Uncle Sam

The selling frenzy that rocked world markets three weeks ago

may have stopped, but the relief rally that followed now appears

to be fading, leaving investors nervously awaiting the next

signal.

Absent an obvious catalyst like a surprise U.S.-China deal

on trade, markets will likely lack direction this week but

remain choppy. Several events, including month-end rebalancing,

U.S. 'Big Tech' earnings, a Bank of Japan policy meeting and

U.S. Q1 GDP and April payrolls, should see to that.

Benchmark equity indexes in Brazil, India and Japan have

fully recovered their post-'Liberation Day' losses, Germany's

DAX on Monday briefly revisited its April 2 close, while the

MSCI All Country World Index and Asia ex-Japan index are both

within a whisker of regaining their April 2 closing levels too.

U.S. President Donald Trump cooling his more belligerent

rhetoric on tariffs and Federal Reserve Chair Jerome Powell have

certainly helped calm the horses, and financial conditions

around the world are beginning to loosen again.

The dollar's continued decline has been a big part of that

loosening, and the greenback retreated again on Monday. Many

banks have slashed their long-term dollar forecasts, and there's

a case to make that a weaker dollar would be a tailwind for

markets and growth around the world in the years ahead.

But does that still apply if the dollar is slumping for

negative reasons, like a global loss of faith in U.S. policy?

What's more, stronger domestic exchange rates will harm non-U.S.

companies' earnings and eat into their profit margins. Throw

that on top of the tariffs that have still to come into effect,

and it's easy to see why the recent sense of relief across

markets is fading.

Companies in Europe, where the euro has surged around 10%,

and Japan, where corporate sensitivity to the exchange rate is

always high, may be particularly exposed.

UBS strategists argue that a diversified global portfolio

should still include "substantial exposure to the world's

largest economy and most developed financial markets," and in

the more immediate term, they see scope for a 'tactical'

recovery in U.S. risk assets, as has often been the case

following periods of high volatility and investor pessimism.

But many will argue this can't last. Trade and economic

uncertainty is too high, visibility is non-existent, and the

damage done to markets and investor and business confidence runs

much deeper than seems apparent right now.

The great US re-rate has begun

The panic selling of U.S. stocks and bonds following the

Trump administration's 'Liberation Day' tariff bombshell may be

over, but the re-rating of American assets is just getting

started.

The question is just how big this reallocation will be.

Money managers are aware that even a modest reduction in

exposure could have a potentially huge impact on asset prices.

That's both because of the sheer size of U.S. markets

relative to total global assets, and the outsized nature of

overseas investors' U.S. holdings in nominal terms and as a

share of their portfolios. In Treasuries, this overweight

exposure is large; in equities it is massive.

To illustrate the big impact that even small changes in

allocations could have, it's worth recalling some of the numbers

involved here.

For instance, the global pension fund industry, which is

significantly overweight U.S. assets, is worth around $58.5

trillion.

Foreign private sector investors have flooded U.S. markets

in recent years, pouring a net $3.25 trillion into U.S. assets

over the last three full calendar years, according to U.S.

Treasury data. Consequently, America's net international

investment position is currently negative $26 trillion.

U.S. stocks accounted for as much as 75% of the $80 trillion

global market cap earlier this year. And at the end of last

year, foreign investors owned 18% of U.S. stocks, a record-high

share going back to 1945, according to strategists at Goldman

Sachs.

Additionally, Japanese and euro zone investors' U.S. fixed

income allocations comprise around 60% of their foreign fixed

income holdings and about 15% of their total fixed income

portfolios, according to strategists at Exante Data. European

investors' U.S. allocation has roughly doubled over the last

decade, they note.

PENDULUM SWUNG TOO FAR?

Looking ahead, the concern is not that we will see blanket

selling of U.S. assets by foreign investors or that the dollar

will no longer be considered the world's reserve currency. Those

scenarios will probably not happen in our lifetimes.

But we are likely to see modest shifts that could have major

price impacts. Anecdotal evidence suggests some Canadian and

European pension funds that have baulked at the Trump

administration's trade, economic and wider policy agendas, have

already started reducing exposure to U.S. assets. They won't be

the only ones.

"I think the coming months will see global portfolios

moderately reduce U.S. allocations, more so overseas investors

than domestic U.S. investors," says Rebecca Patterson, former

chief investment strategist at Bridgewater Associates.

If global investors do trim their U.S. holdings, there will

be both a one-off hit to asset prices and a long-term reduction

in upside potential because the level of future demand will be

weaker.

This will be mitigated if U.S. investors fill the gap. But

that could be difficult.

At the end of last year, U.S. households' equity holdings as

a share of their total assets and total financial assets were at

record highs of 29.5% and 43.5%, respectively. Exante Data's

team notes that around 95% of U.S. investors' fixed income

holdings are already allocated domestically.

The 'anti-U.S.' pendulum may have swung too far in recent

weeks. Bank of America's April global fund manager survey found

that a record share of investors intend to cut their U.S. stock

holdings, the U.S. corporate profit outlook is the gloomiest

since 2007, and the outlook for the U.S. dollar is the most

bearish since 2006.

The risk premium on U.S. markets has risen, with bond yields

up and the 'term premium' on the U.S. 10-year Treasury note the

highest in a decade. And for good reason, given the volatility

seen since President Donald Trump's April 2 tariff announcement.

Prices are adjusting, as they should. How long that

adjustment will take and how deep it will be remains to be seen.

The unmatched depth, liquidity and dynamism of U.S.

financial markets are not in doubt. But in the new world order

fast emerging from the Trump administration's 'America First'

drive, U.S. assets' relative attractiveness certainly is.

What could move markets tomorrow?

* Chinese earnings, including from financial heavyweights

Bank of

China, HSBC ( HSBC ), China Construction Bank and ICBC

* European Central Bank Executive Board member Piero

Cipollone

speaks

* Bank of England deputy Governor Dave Ramsden speaks

* Germany GfK consumer confidence (May)

* U.S. consumer confidence (April)

* Reaction to Monday's Canadian general election

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.

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