The escalation of uncertainty in the geopolitical situation has once again triggered turmoil in the global financial markets.
Affected by the escalation of tensions in the Middle East, European stock markets have fallen across the board, and the three major U.S. stock indexes also saw significant declines, with the Dow Jones Industrial Average plunging over 700 points, down 1.79%; the Nasdaq Composite Index and S&P 500 Index both dropped over 1%. The latest data from Bank of America shows that, as of this Wednesday, the redemption scale of U.S. stock funds reached approximately $9.8 billion (equivalent to over 70 billion yuan), setting a new high in 11 weeks.
Some analysts state that the current market behavior perfectly aligns with a "risk-averse" model, which may just be the starting point for the market. Investors are closely monitoring the developments in the Middle East situation, the outlook for the U.S. economy, and the monetary policy path of the Federal Reserve.
Regarding the direction of the Federal Reserve's MMF policy, former U.S. Treasury Secretary Janet Yellen predicted in her latest speech that President Trump's tariff policy will lead to rising inflation, with this year's inflation rate expected to reach at least 3%, and the Federal Reserve will continue to firmly maintain its stance of inaction.
Fierce selling.
The latest data from Bank of America shows that U.S. stock funds have experienced the largest outflow of funds in nearly three months.
The report shows that, as of this Wednesday, the redemption scale of U.S. stock funds reached approximately $9.8 billion (equivalent to over 70 billion yuan), setting a new high in 11 weeks. Meanwhile, European funds, which have significantly outperformed U.S. stocks this year, also faced their first net outflow in nearly nine weeks, with a net outflow scale of $0.6 billion.
It is worth noting that this data does not reflect the turmoil in the global financial markets on Friday. Under the influence of escalating tensions in the Middle East, major European indexes fell across the board on Friday, and by the close, the benchmark stock indexes in France, Germany, Spain, and Italy all closed down over 1%.
The three major U.S. stock indexes also fell sharply, closing on Friday, $Dow Jones Industrial Average (.DJI.US)$ down 1.79%, $Nasdaq Composite Index (.IXIC.US)$ down 1.3%, $S&P 500 Index (.SPX.US)$ down 1.13%, $Russell 2000 Index (.RUT.US)$ A sharp drop of 1.85%. In addition, $VIX (LIST91327.US)$ It rose significantly by 15.65%, closing at 20.84, with a cumulative increase of 24.27% this week.
Currently, investors are closely monitoring the developments in the Middle East, the outlook for the U.S. economy, and the monetary policy path of the Federal Reserve.
Geoff Yu from Bank of New York Mellon stated that the current market behavior completely aligns with a "risk-averse" model. This may just be the starting point for the market, but recent correlations have fluctuated greatly, and the future direction of the market will largely depend on the reactions of Iran, the United States, and other relevant parties.
Michael Hartnett, Chief Investment Strategist of Bank of America Global Research, interpreted that for the U.S. stock market, further increases are only healthy when the uptrend covers a broad range of sectors. He also cautioned that the recent stagnation of the European stock market and the weakness of Japanese bank stocks could potentially serve as the first signal of a "bull market trap" in the third quarter.
Previously, Hartnett warned that after a nearly 20% rebound in various markets within just two months, the markets have overheated and are close to triggering a "technical Sell" signal. As investors overleverage risk assets, theoretically the market's purchasing power may soon be exhausted, making it prone to price adjustments.
Since the beginning of this year, Hartnett has been one of the representative Analysts bearish on the U.S. stock market. He has consistently advised investors to increase their Shareholding in international stocks, believing that these Assets will outperform U.S. stocks. In a report in May, Hartnett wrote, "No Assets can outperform Emerging Markets Stocks."
The global bond market giant PIMCO stated in its latest report that, as the global trade and alliance order is being reshaped during Trump's second term, it seems likely to persist, and investors should focus on high-quality Bonds. Since the end of the Clinton era almost 25 years ago, U.S. Stocks have never been this expensive relative to U.S. Bonds.
Meanwhile, Bank of America Merrill Lynch's latest warning states that Trump's "Big Beautiful Plan" cannot achieve fiscal balance through growth effects, nor can it provide significant growth momentum for the economy.
In its latest Research Reports, Bank of America Merrill Lynch stated that Trump's "Big Beautiful Plan" cannot achieve fiscal balance, and more critically, the plan's stimulative effect on economic growth is very limited, with the average GDP growth rate only expected to increase by 3 basis points over the next 10 years.
According to the report, based on the estimates of the Joint Committee on Taxation (JCT), the total cost of the plan amounts to $2.3 trillion, but it can only generate $102.8 billion in income feedback, with a self-paying ratio of only 4.5%.
The self-paying ratio refers to the ratio between the income generated by the plan's stimulation of economic growth and the expenditures. Bank of America Merrill Lynch states that to achieve self-repayment, GDP needs to grow by 9% before fiscal year 2034, a target that is nearly impossible to achieve.
The Yale Budget Lab believes the plan will push the growth rate from 1.8% to about 2% before 2027, but thereafter, the burden of federal debt will weaken and reverse this effect.
Yellen's latest statement
Former U.S. Treasury Secretary Yellen predicted in her latest speech that despite a slowing trend in U.S. inflation, Trump's tariff policy will lead to rising inflation and a decline in average household income.
During a program, she stated, "I expect that due to the impact of tariffs, this year's inflation rate will reach at least 3%, or slightly above 3%."
However, Yellen also pointed out that regarding Trump's tariff policies, "there remains a great deal of uncertainty about which (tariff measures) will actually take effect."
But she stated, "I am very confident we will see them (Trump's tariff policies) affect prices."
Yellen added that this would lower average household income. "The latest and most optimistic estimates I have seen suggest that due to tariffs and their ripple effects, the income of average families will decrease by about $1,000."
She also mentioned that this figure could be higher, depending on the progress of the tariff plans.
Yellen pointed out that the Federal Reserve "cannot grasp well how tariffs will affect labor market spending or inflation." She added, "Therefore, I expect the (Federal Reserve) will continue to remain firmly on hold."
Meanwhile, analysts are also cautious about the Federal Reserve's outlook for rate cuts. According to analysts from Allianz Research, the Federal Reserve may remain on hold until December before cutting rates. The adjustment in expectations was made because they believe U.S. inflation will peak in early Q4, not Q3. Analysts stated that the Federal Reserve is unlikely to ease monetary policy during the inflation peak.
Hua Chuang Securities released a research report stating that unless Trump continues to suspend or cancel the so-called "reciprocal tariffs" due to negotiations this year, the upside risk of inflation remains worthy of caution. The next two to three months will be an important window for the Federal Reserve to observe inflation, during which it is highly likely to remain on hold.
Editor/joryn
