ORLANDO, Florida, July 29 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

The S&P 500 and Nasdaq ground out new highs on Tuesday but

closed in the red, as earnings optimism faded and investors took

chips off the table ahead of the Federal Reserve's policy

decision and steer on Wednesday.

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

part retail investors are playing in Wall Street's rise and how

it may be different from previous market rallies.

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. IMF nudges up 2025 growth forecast but says

tariff risks

still dog outlook

2. Dollar shedding its tariff risk premium: Mike

Dolan

3. Fed's policy toolkit may be headed for

fundamental

changes

4. Bond investors warm to risk, with Fed staying put

in

'Goldilocks' economy

5. Enough apologies: How Japan is shaking its price

hike

phobia

Today's Key Market Moves

* FX: Dollar index hits 5-week high, ends the day up

0.3%.

Euro slides again, now off 1.5% in just two days.

* STOCKS: U.S. stocks close in the red, led by the

Russell

2000's and Dow's declines of 0.6% and 0.5%, respectively.

* SHARES/SECTORS: S&P 500 industrials down more than

1%,

UPS, UnitedHealth, Boeing among big decliners after results.

* BONDS: U.S. 2s/10s curve flattens for eighth day

in

nine. 30-year yield down 10 bps, biggest fall since February.

* COMMODITIES: Oil leaps 3.5%, biggest rise since

June 17,

as Trump pressures Russia over Ukraine and on global trade

optimism. Brent above $73/bbl, WTI futures above $69.50/bbl.

Stocks stumble, dollar up as Fed looms

A day of consolidation and reversal across major equity and

bond markets on Tuesday saw Wall Street ease and Treasury yields

fall back as investors braced for Wednesday's Fed meeting and

press conference from Chair Jerome Powell.

No change on rates is the near-unanimous expectation across

markets. So the focus will be on how Powell assesses the recent

U.S. trade deals with Japan and Europe, the tariff impact on

growth and inflation, and perhaps more intriguingly, the barrage

of criticism flowing his way from President Donald Trump.

Data on Tuesday showed that the U.S. goods trade deficit

unexpectedly shrank to a near-two-year low in May, auguring well

for a rebound in growth in the second quarter. Goldman Sachs

economists upgraded their annualized Q2 GDP growth tracking

estimate to 3.1% from 2.6%.

The International Monetary Fund lifted its global growth

forecasts too, signaling that the worst-case tariff scenarios

have faded from view. But huge trade uncertainty still persists,

on top of geopolitical tensions, a murky interest rate outlook

and large fiscal deficits.

Much of the immediate trade uncertainty centers on the

U.S.-China nexus. High-level talks in Stockholm ended on Tuesday

with both countries agreeing to seek an extension of their

90-day tariff truce. But if Trump doesn't agree to extend the

August 12 deadline, tariffs could "boomerang" back to April 2

levels or maybe higher, U.S. Treasury Secretary Scott Bessent

said.

The currency market, however, showed no sign of reversal on

Tuesday. The dollar rose for a second day following the

U.S.-European Union trade deal, a solid rebound that suggests

the greenback may be shedding its elevated trade risk premium.

A stronger dollar is not in the Trump administration's

playbook though, and it will be fascinating to see how the White

House responds if it continues to appreciate. Given Trump's

views on the Fed, calls for lower rates would be a reasonably

safe bet.

All eyes now turn to the Fed and Powell's press conference

on Wednesday, a day jam-packed with other major events. They

include: second quarter U.S. and euro zone GDP estimates, an

interest rate decision from Canada, and U.S. earnings reports

from Meta and Microsoft.

Retail replaces 'smart money' as Wall Street rocket fuel

Retail investors are often late to Wall Street parties, only

catching the rally once it's established and "smart money" is

looking for the exit. But that doesn't appear to be the case

this time around.

Flow and survey data show that - far from playing catch-up -

retail investors are a key force behind the latest U.S. equity

whoosh that has been lifting the S&P 500 and Nasdaq to new highs

on a near-daily basis.

Retail investor participation as a share of total S&P 500

flow last week reached 12.63%, according to calculations by

Goldman Sachs analysts. That's the highest share since February

and well above the recent average, as retail participation has

rarely exceeded 13% in the last few years, their figures show.

Retail investors have been the "primary" driver of the

current rally, Barclays equity strategists suggest, pouring more

than $50 billion into global stocks over the last month. And

their enthusiasm for equities is continuing to build, while

institutional participation remains "muted", Barclays

strategists note.

"Re-risking seems to be the priority for small investors as

improved sentiment into 2Q25 earnings, resilient macro data and

Fed cut speculation combine to outweigh still-lingering tariff

threats and deficit concerns," they wrote last week.

This optimism was underscored in Morgan Stanley's latest

quarterly survey of retail investors published last week. It

shows 62% of those polled are now bullish U.S. equities, and 66%

reckon the U.S. market will rise by the end of the quarter.

These are both the highest levels since the survey was launched

two and a half years ago.

LONG KRISPY KREME

This surge in retail activity could be a positive

development. At a basic level, broader participation and

democratization of the market is to be welcomed. And some

analysts reckon the retail investor community has matured since

2021 when the "meme stock" frenzy spilled over into the wider

market.

But current retail trading still includes some of this

highly speculative, often options-related meme stock activity,

with the main targets this time around being heavily shorted

names like Krispy Kreme, GoPro and Kohl's.

Indeed, Bank of America analysts note, "zero-day to expiry"

options that are popular with retail investors recently

accounted for more than 60% of all S&P 500 options trading

activity.

And the longer the rally continues, the more fears of a

major correction that crushes the retail community are bound to

grow. These fears are not unwarranted.

The latest figures from the Financial Industry Regulatory

Authority (FINRA) show that margin debt in U.S. stocks has

crossed the $1 trillion mark for the first time. This represents

both retail and institutional investors' activity, but according

to JP Morgan analysts, the retail cohort is predominantly

responsible for the rise.

Of course, investors' margin debt would be expected to rise

over time in line with inflation and the underlying equity

indices, particularly in a bull market. But some analysts still

consider rising margin debt a sign of market froth or outright

over-exuberance.

REGULATORY EASING

On top of all this, retail investors may soon get a helping

hand from Washington. A series of what Bank of America analysts

call "financial regulation policy-easing" measures are being

lined up that will facilitate retail investors' trading in

equities and other less-liquid markets.

For example, the Trump administration is drawing up an

executive order to allow retail investors to add private equity

into 401(k) retirement funds. Media reports also suggest FINRA

is considering proposals to ease the "Pattern Day Trading Rule"

- which was set up to limit highly speculative trading practices

- by slashing investors' minimum margin account balance

requirements to $2,000 from $25,000 currently.

Of course, with deregulation comes higher risk and lower

protection for investors. But for now, retail investors are in

the driver's seat and enjoying the ride.

What could move markets tomorrow?

* Australia CPI inflation (Q2)

* Japanese earnings, including Toyota, Nissan, Panasonic

* Euro zone GDP (Q2, flash estimate)

* Canada interest rate decision

* Brazil interest rate decision

* U.S. GDP, PCE inflation (Q2, advance estimate)

* U.S. ADP private sector employment (July)

* U.S. Federal Reserve policy decision and statement, Chair

Jerome

Powell's press conference

* U.S. earnings, including Meta and Microsoft

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