ORLANDO, Florida, Aug 6 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Wall Street rallied on Wednesday as investors continued to

take their cue from earnings and AI-related optimism over

tariffs, while a weak 10-year Treasury note auction served as a

reminder of the precarious U.S. fiscal situation.

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

investors' apparent readiness to accept tariffs challenges the

orthodoxies that have underpinned economic liberalism and world

markets for the past 40 years.

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 imposes additional 25% tariff on Indian

goods,

relations hit new low

2. India-U.S. spat over trade and oil threatens

wider

fallout

3. Lula rejects 'humiliation' of calling Trump over

U.S.-Brazil tariff

4. Biden-era appointees could stymie Trump's effort

to

reshape Fed

5. Bank of England's long unwinding road: Mike Dolan

Today's Key Market Moves

* FX: Dollar index falls 0.5%, its fourth straight

decline. Brazil's real rises 0.8% to a one-month high of 5.45/$.

* STOCKS: Nasdaq climbs 1.2%, the best performing

major

index on Wall St.

* SHARES/SECTORS: U.S. consumer discretionary index

+2.5%,

consumer staples index +1.8%. Apple +5%, Super Micro Computer

-18%.

* BONDS: A weak 10-year Treasury auction pushes

longer-dated yields up as much as 5 bps, steepening the curve.

* COMMODITIES: Oil falls for a fifth day, hits new

five-week lows after U.S. Secretary of State Marco Rubio

suggests there may be an announcement on potential sanctions

against Russia.

Wall St momentum calms tariff shakes

Positive investor sentiment and risk appetite were on full

display on Wednesday, as optimism around corporate earnings and

the U.S. tech boom again overshadowed more worrisome global

developments on tariffs and growth.

Traders cheered news that ChatGPT maker OpenAI is mulling a

stock sale that could value the company at $500 billion and

Apple's pledge to spend $100 billion on U.S. manufacturing. U.S.

earnings continue to surprise to the upside too, and the S&P 500

consumer discretionary index rose 2.4%, its best day since May.

Wall Street stood in contrast to a more subdued global

session. Benchmark Asian, emerging and European indices were all

flat on Wednesday, with the Trump administration's tariffs

weighing on sentiment across the board.

The major exception was China, where blue chip stocks closed

at their highest in more than three and a half years on hopes

that the United States and China will strike a trade deal in the

coming days.

Trade-related optimism elsewhere, however, is in much

shorter supply. U.S. President Donald Trump on Wednesday slapped

further import duties on India, bringing the total tariff rate

to 50%, while Brazil's President Luiz Inacio Lula da Silva told

Reuters that relations with the U.S. are at a 200-year low.

Some Fed officials, meanwhile, are signaling growing unease

about the U.S. labor market and economy. Minneapolis Fed

President Neel Kashkari and San Francisco Fed President Mary

Daly on Wednesday said interest rates should probably be lowered

in the coming months.

In bonds, a weak $42 billion sale of 10-year U.S. government

bonds drew the weakest demand in a year, and followed a somewhat

disappointing auction of $58 billion three-year notes the day

before. Thursday's $25 billion sale of 30-year bonds will come

under even greater scrutiny.

Also on Thursday, the Bank of England is widely expected to

cut its key interest rate to 4% from 4.25%. But the challenges

facing the Bank are significant - the fiscal outlook appears to

be deteriorating sharply, and inflation is close to double the

central bank's 2% target.

Before that China announces July trade data, with economists

expecting export growth to slow and the surplus to narrow.

Earlier this week, official U.S. figures showed that the U.S.

trade gap with China in June shrank to its lowest in more than

21 years.

Markets' tariff resilience challenges long-standing economic

orthodoxy

Investors have been living in a real-time economic

experiment ever since U.S. President Donald Trump returned to

the White House in January.

Whether it's tariffs, "America First" isolationism, overt

politicization of independent economic institutions, or upended

global economic norms, markets are having to deal with

challenges few investors have faced before.

So how are they reacting to the leader of the free world

ripping up the economic playbook that has shaped the global

financial system for 40 years?

Wall Street and world stocks are at record highs, U.S. high

yield corporate bond spreads are the tightest since before the

2007-08 global financial crisis, and Treasuries are remarkably

calm, with the 10-year yield below its average of the last two

years.

It's not all serene, of course. The U.S. "term premium" - a

measure of the extra compensation investors demand for holding

long-dated Treasuries over short-term debt - is the highest in

over a decade. Inflation expectations and long-dated yields have

shot up too.

And one needs to acknowledge that the full impact of Trump's

tariffs has yet to be fully felt.

But, at this point there has been no U.S. recession, even if

growth is slowing. And the market plunge on the back of Trump's

April 2 "Liberation Day" tariff debacle lasted a few weeks.

The powerful stock market recovery since then suggests

investors were less bothered by the actual tariffs than the

shock of the initial announcement, the chaotic way it was

delivered, and the amateurish way the levies were calculated.

This outcome is not what economic textbooks would have

predicted.

ONE FOR YOU, 19 FOR ME

Tariffs are a tax.

And the overall U.S. average effective tariff rate looks

likely to be around 18%, according to the Budget Lab at Yale.

That's down from an estimated 28% in May but still nearly eight

times higher than the level in December.

Who will ultimately pay this tax is up for debate, but if

sustained at that level, the president of the United States will

have effectively imposed a tax hike worth around 1.8% of GDP,

one of the largest in U.S. history.

But wait. Aren't higher taxes bad for business, markets and

growth? Don't higher taxes sap consumers' spending power, stunt

investment and hiring, and crush the private sector's

entrepreneurial spirit?

Markets' relatively speedy acceptance raises the question:

What happened to the last 40 years of economic orthodoxy,

symbolized by the so-called "Washington Consensus"?

This was the set of principles drawn up in the late 1980s

that broadly mirrored the views of the Washington-based

International Monetary Fund, World Bank and U.S. Treasury,

ostensibly to help direct policy in Latin America but which

ultimately served as the economic framework for Western liberal

democracies and global markets.

They included support for privatization, deregulation, the

free flow of capital, fiscal discipline, and lower taxes. They

also entailed lower barriers to trade, a cornerstone of

globalization.

For years these tenets were regarded by policymakers,

business leaders and investors as sacrosanct. Some, like rigid

adherence to tight fiscal policy, were put to the test - and

shown to be flimsy, at best - during the GFC and pandemic.

So now that the tariff line has been crossed, what about

other economic commandments? Could governments look to raise tax

revenue from other sources, such as wealth taxes on the super

rich, a "Tobin tax" on foreign exchange transactions, or other

"soft" capital controls?

These are obviously anathema to the doctrine of free market

capitalism. But then so were tariffs.

To be fair, we are just entering this new era. And as my

colleague Mike Dolan observed earlier this week, even if tariffs

don't send the economy or markets into a tailspin, they may

still lead to a "slow burn," with many years of lost economic

potential, elevated volatility and lower investment returns.

But investors aren't looking that far ahead. What they see

right now is a pretty resilient U.S. economy, solid earnings

growth, and red-hot optimism around U.S. tech and AI. And some

of the old orthodoxies may be in the rear-view mirror.

What could move markets tomorrow?

* Australia trade (June)

* Japan earnings, including Softbank, Sony, Toyota

* China trade (June)

* China FX reserves (June)

* Bank of England interest rate decision

* Germany trade (June)

* Germany industrial production (June)

* U.S. weekly jobless claims

* U.S. Treasury auctions $25 bln of 30-year bonds

* U.S. earnings including Eli Lilly, ConocoPhillips, Gilead

Sciences, Motorola

* Atlanta Fed President Raphael Bostic speaks

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