ORLANDO, Florida, June 25 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

After two days of strong gains in world stocks amid the

widespread relief over cooling Middle East tensions, relative

stability was the hallmark of trading on Wednesday, with major

asset classes moving in much narrower ranges.

In my column today I look at U.S. foreign direct investment -

was the sharp decline in the first quarter an anomaly, or a

warning of what's to come in the brave new tariff world? 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. Fed's Powell cautions against ending Fed power to

pay

interest on reserves

2. U.S. current account gap clocks pre-2008 crash

milestone: Mike Dolan

3. Israel-Iran war highlights Mideast's declining

influence

on oil prices: Bousso

4. NATO commits to spending hike sought by Trump,

and to

mutual defence

5. U.S. exchanges, SEC in talks to ease public

company

regulations

Today's Key Market Moves

* World stocks and the Nasdaq 100 hit new peaks for a second

day

in a row. The S&P 500 slips, but is still very close to its

record high.

* Some big moves in U.S. tech, with Super Micro Computer

+8.8%,

Nvidia +4.3% to a record high, AMD +3.6%, and Tesla -3.8%. Real

estate is the biggest declining sector, -2.5%.

* Oil stops the rot, kind of, gaining nearly 1% on

U.S.

crude inventory drawdown and signs of strong U.S. gasoline

demand.

* The dollar slips to fresh multi-year lows against the euro

and

sterling.

* Platinum up another 2.5% to new 11-year high above

$1,350/oz.

Now up 28% in June, on for its best month since 1986.

Whirlwind fades, calm returns

The MSCI All Country index and Nasdaq 100 touched new record

highs for a second session, and Asian and emerging market stocks

posted solid gains earlier in the day. But the Dow, U.S. small

caps and benchmark European indexes all fell.

The euro's march higher is taking its toll, and European

stocks have underperformed since the brief Israel-Iran war broke

out on June 13. The euro on Wednesday rose for a fifth straight

day to $1.1665, its highest since October 2021.

Sterling hit its highest since February 2022 at $1.3670, and

Britain's FTSE 100 slipped to its lowest this month. Bank of

England policymakers may be secretly cheering the pound's rally,

however, if it helps tame inflation pressures.

The latest Citi/YouGov survey of UK consumers' inflation

expectations on Wednesday showed that long-term inflation

expectations among the British public rose to the highest since

September 2022.

One sector faring better in Europe on Wednesday, though, was

defense, after NATO leaders agreed big increases in defense

spending, especially from Europe. U.S. defense stocks have moved

in the other direction this week following the Iran-Israel

ceasefire.

On the policy and macro front, Fed Chair Jerome Powell's

second day of congressional testimony passed off without

fireworks, although there were sparks in his exchanges with some

lawmakers. He reiterated his view that the central bank is right

to wait and see what the impact is from tariffs before

considering further rate cuts.

U.S. foreign investment slump - anomaly or warning?

Much of the 'de-dollarization' debate has focused on

foreign exposure to U.S. securities like stocks and bonds. But

investors shouldn't ignore foreign direct investment flows, the

traditionally sticky capital that may also be sending out

warning signals.

Foreign direct investment typically involves an overseas

entity acquiring the assets of a company in another country or

increasing its holdings, often via the purchase of machinery,

plants or a controlling stake. FDI is therefore considered a

longer-term investment compared to portfolio flows, which can be

more volatile.

U.S. President Donald Trump says he has attracted record

foreign investment into the country. Indeed, the White House has

a page on its website with a "non-comprehensive running list of

new U.S.-based investments" since Trump's second term began. The

running total is in the trillions of dollars and includes

pledges from several foreign countries.

Included are more than $4 trillion in U.S.-bound investments

pledged by the United Arab Emirates, Qatar, Japan and Saudi

Arabia. During Trump's trip to the Middle East last month, he

said the U.S. is on track to receive $12-$13 trillion of

investments from countries around the globe, which includes

"projects mostly announced ... and some to be announced very

shortly."

These flows may emerge in full, in time. But official

figures on Tuesday showed that FDI in the first quarter actually

fell to $52.8 billion, the lowest total since the fourth quarter

of 2022. That's well below the quarterly averages of the past 10

and 20 years.

The Commerce Department figures also showed that the U.S.

current account deficit widened to a record $450.2 billion in

the quarter, or 6% of U.S. GDP, meaning FDI inflows barely

covered 10% of that shortfall.

Should the Trump administration be worried?

TARIFF DISTORTIONS

The short answer is probably not, at least not yet.

FDI flows are typically far smaller than portfolio flows

into equity and fixed income securities, so from the perspective

of funding the current account deficit, the drop in FDI is not

as pressing a concern.

On the other hand, if foreign investors are also buying

fewer U.S. securities, capital from elsewhere will be needed to

fund that deficit.

Additionally, America's balance of payments data in the

first quarter was hugely distorted by domestic consumers and

businesses front-running Trump's tariffs, loading up on imports

before the duties kick in later this year.

Trump's bet is that the deficit will shrink this year and

beyond as his 'America First' policies spur more "onshoring"

from domestic firms as they bring production back home and the

weakening dollar helps U.S. manufacturing by making exports more

competitive. The subsequent boom will attract investment from

companies and governments overseas. In theory.

However, these dynamics work both ways.

For example, the European Union is by far the largest

provider of U.S. FDI, accounting for 45% of the total in 2023,

according to Citi. The combination of the continent's German-led

fiscal splurge, U.S. tariffs and 'de-dollarization' concerns

could easily crimp that flow, perhaps significantly.

Another potential risk to U.S.-bound FDI is 'Section 899' -

the possible tax of up to 20% on foreigners' U.S. income that

could be part of Trump's budget plans. A Tax Foundation report

in May found that Section 899 would "hit inbound investment from

countries that make up more than 80 percent of the U.S. inbound

FDI stock."

Industry pushback may water down Section 899, but it remains

a cloud on the U.S. investment horizon.

The U.S. is the world's biggest recipient of FDI, with a 25%

share of global volumes in 2023, up from around 15% before the

pandemic, according to Citi. Its economy is the largest in the

world, a thriving hub of innovation, pioneering technology,

artificial intelligence and money-making potential.

That will always attract FDI. Whether it attracts as much in

this new environment remains to be seen.

What could move markets tomorrow?

* Germany GfK consumer confidence (July)

* European Central Bank President Christine Lagarde, Vice

President Luis de Guindos and board member Isabel Schnabel speak

(at different events)

* Bank of England Governor Andrew Bailey and Deputy Governor

Sarah

Breeden speak (at different events)

* U.S. weekly jobless claims

* U.S. durable goods (May)

* U.S. trade (May)

* U.S. GDP (Q1, final estimate)

* U.S. 7-year note auction

* Richmond Fed President Thomas Barkin, Cleveland Fed

President

Beth Hammack and Fed Governor Michael Barr speak (at different

events)

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