ORLANDO, Florida, May 1 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

From 'Lag 7' back to 'Mag 7'?

The clouds of trade-related economic uncertainty are dark

and heavy, but world markets were bathed in sunny optimism on

Thursday as upbeat Microsoft and Meta earnings suggested there

may be life in the U.S. 'Big Tech' trade yet.

Meanwhile, debate continues to swirl on the fallout from the

record hit to U.S. GDP from trade in the first quarter. Imports

were the culprit, but exports won't be immune from the trade war

going forward. More on that below, but first, a roundup of the

main market moves.

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, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. US wants to start tariff talks with China, state

media

says

2. Big Tech's fortunes diverge as AI powers cloud,

tariffs

hit consumer electronics

3. Euro zone tortoise overtakes US hare: Mike Dolan

4. Bank of England could signal faster rate cuts

after

Trump tariffs

5. Asian equities may be relative winner in US

recession

Today's Key Market Moves

* Wall Street closes in the green thanks to a powerful tech

rally

- the Dow gains 0.2%, S&P 500 adds 0.6% and the Nasdaq ends up

1.5%.

* Microsoft shares surge 7.6%, Meta shares climb 4.2%,

Nvidia

shares rise 2.5%.

* Britain's FTSE 100 ekes out a slender gain to extend its

winning

streak to 14 sessions. One more on Friday, and it's a new record

since the index was launched in 1984.

* The yen tumbles

1.7% through 145.00 per dollar - its biggest fall this

year - after the Bank of Japan's 'dovish hold' on interest

rates.

* The dollar index rises 0.8% to a three-week high back

above

100.00.

* A rollercoaster for U.S. bond yields - they hit a

three-week low

on the back of spiking jobless claims, before rebounding sharply

on better-than-expected manufacturing data.

* Oil falls again. Brent crude hits a four-year

closing

low of $62/bbl, and is down 26% y/y. That's disinflation.

* Gold falls nearly 2% to a two-week low close to $3,200/oz.

Tech tonic!

Welcome back 'U.S. exceptionalism', Wall Street has missed

you!

Bullish outlooks and pledges to invest heavily in artificial

intelligence from Meta and Microsoft on Wednesday followed

similar guidance last week from Google parent Alphabet. And

although the optimism was dented by Amazon and Apple on

Thursday, investors are reminded that Silicon Valley won't stand

idle in the face of China's push for tech and AI dominance.

The 'Magnificent Seven' have been clobbered in recent months

as the emergence of Chinese AI startup DeepSeek cast doubt over

bloated valuations and the assumed omnipotence of U.S. 'Big

Tech'.

The Roundhill 'Mag 7' exchange-traded fund lost a third of

its value between December 18 and April 7. But Thursday's surge

means it has rebounded 20% in the last three weeks, and is now

back above its close on April 2 when U.S. President Donald Trump

unveiled his sweep of global tariffs.

So is the Nasdaq, more than recovering the 13% losses it

incurred in the days after 'Liberation Day'. The Dow is still 3%

lower, but is on its longest winning streak in almost a year -

eight days and counting. The S&P 500 is flat, having clawed back

its 15% 'Liberation Day' decline.

It's a show of resilience, which in some ways is remarkable.

The first quarter earnings season hasn't been all rosy, and

dozens of companies have cut forecasts or removed guidance

altogether. GDP contracted in the first quarter, the growth

outlook is murky at best and cracks are starting to appear in

the labor market.

But perhaps reports of U.S. Big Tech's demise have been

greatly exaggerated. LSEG estimates suggest the group's

January-March earnings will rise 21.4% against 8.3% for the S&P

500's remaining 493 constituents.

And even taking into account their underperformance in

recent months, the 'Mag 7' stocks' weighting in the S&P 500

index is still around 30%, down from a record 34% in January.

The question from investors now is whether the

post-Liberation Day rebound has put these shares back into 'fair

value' territory. Do they have more momentum, or not?

It's been a crowded trade for the last two years at least,

and although investors have trimmed their positions this year,

they will still be heavily long.

Tech benefits more than most sectors from lower interest

rates, so the recent slide in Treasury yields will have helped

juice the recovery. That recent run snapped back abruptly on

Thursday, as Treasury yields climbed as much as 7 basis points

at the short end of the curve.

This helped support the dollar, but the biggest mover in FX

on Thursday was the yen, which posted its biggest fall this year

after the BOJ held rates as expected but slashed its economic

growth outlook.

Most central banks have preferred to take a 'wait and see'

approach to the growth outlook in the face of heightened tariff

uncertainty. But the BOJ stuck its neck out and halved its

growth forecast for fiscal year ending March 2026 to 0.5% from

1.1%.

It would appear that the BOJ's tightening cycle is over.

After record import blow to U.S. GDP, beware export sucker punch

Net trade delivered a record blow to the U.S. economy in the

first quarter, as U.S. companies ramped up imports to get ahead

of the Trump administration's tariff tsunami.

While the focus is rightly on imports, it's also worth

considering the export side of the ledger and the damage that

could be caused by retaliation to Trump's trade war.

Imports exploded 41.3% in the first quarter, causing a net

4.8 percentage point drag on growth. That was the largest since

records began in the 1940s.

Tariffs on imports make goods coming into the country more

expensive, which is why businesses gobbled up as many as they

could during the quarter in anticipation of Trump's levies.

While a repeat on this scale in the second quarter is

unlikely, imports are likely to remain a heavy drag on growth as

firms stock up before the new duties on imports kick in.

Exports also rose in the January-March period, but by an

unremarkable 1.8%. If history is any guide, that figure could

start shrinking because of retaliation in response to Trump's

tariff salvos.

While dozens of countries are trying to strike deals with

the U.S., that does not mean they will simply roll over,

especially if Washington plays hard ball. Many will retaliate in

kind, making U.S. goods more expensive and uncompetitive in the

international market.

The Trump administration may not fully appreciate this risk.

A 2021 working paper 'The Smoot-Hawley Trade War' by the

National Bureau of Economic Research noted that Peter Navarro,

then Director of Office of Trade and Manufacturing Policy and

now a senior counsel to Trump, predicted that no country would

retaliate against U.S. tariffs.

"The evidence from the 1930s suggests it is a mistake, even

for a country as wealthy and powerful as the United States, to

assume that it can engage in a trade war with impunity," the

paper concluded.

'CATASTROPHIC'

Of course, the world today is unrecognizable from that of

1930 when President Herbert Hoover signed into law the infamous

'Smoot-Hawley Tariff Act', which raised tariffs on thousands of

imports into the United States.

The manufacturing process today is global, complex and much

more sophisticated. Some 40% of U.S. imports are inputs used in

the production of other goods and services. Trade was a lot more

straightforward in the 1930s.

But this protectionist measure - which the U.S. Senate's

website describes as "among the most catastrophic acts in

congressional history" - is widely cited as a key contributor to

deepening the Great Depression, partly because many of America's

trading partners retaliated in kind and global trade nose-dived.

The NBER paper found that U.S. exports to countries that

'protested' the Smoot-Hawley import tariffs fell by 15-22%,

while exports to 'retaliators' plunged by 28-33%. And if we

focus on key exports, those from 'retaliators' and 'protesters',

in aggregate, fell by an average of 22.5% after Smoot-Hawley.

Canada was a particularly aggressive 'retaliator' in the

1930s. And nearly 100 years later, under the leadership of newly

elected Prime Minister Mark Carney, it could once again be among

the world's most spirited fighters in the trade war with

Washington.

Canada is the USA's number one export market, and goods

trade between the two countries last year totaled $762 billion.

The Canadian Chamber of Commerce estimates that 3.7 million jobs

across both nations are tied to that bilateral trade.

ELASTIC DEMAND

The U.S. is currently the world's second-largest global

exporter, but net exports usually subtract from growth because

the U.S. has run a trade deficit for the past 50 years. Last

year, goods exports totaled $2.1 trillion, and imports totaled

$3.3 trillion.

Trump believes his tariffs will slash the deficit, revive

U.S. industry, and bring back the manufacturing jobs that have

been lost over the decades. But if U.S. companies could produce

more cheaply at home, they would. And it takes years to set up

factories and production lines, so even if Trump's policies do

bear fruit, it won't be for a long time.

Once the dust settles and trade deals have been reached, the

levels of duties will probably have come down from what Trump is

currently threatening. But tariffs will likely still be the

highest in decades, and many countries will almost certainly

have reacted in kind, for political and economic reasons.

"Foreign demand is elastic, countries can substitute for

American goods. Our export growth will slow down," says

economist John Silvia.

So net exports will almost certainly remain a drag on growth

for some time to come. The only question is how big that drag

will be.

What could move markets tomorrow?

* Euro zone inflation (April, flash estimate)

* Euro zone PMIs (April)

* U.S. non-farm payrolls (April)

* More Q1 earnings Friday, including Exxon

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

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