The current market environment is very sensitive. The $170 billion Fed infusion has eased the pressure on the risk markets, but it has not taken the pressure off the tariffs, oil-driven inflation and rising long-term rates. The S&P 500 is already at new highs. The Nasdaq 100 rally is led by tech. The FTSE 100 could be supported by oil and the weakness in the sterling.
But there is tariff and war risk. Trump’s comments about US tariffs add a new layer of uncertainty for U.K. exports. GBP/USD is at risk if sterling depreciation is offset by higher U.S. yields. EUR/GBP could gain if the dispute is seen as U.K. issue. The Dollar Index is approaching a key support level, but rising oil and U.S. bond yields could limit a fall in the dollar.
The best case for the S&P 500 is confirmed by the Dow Jones 30 and the Transportation Index. If Dow Jones 30 and transportation index break the 50,000 and 1,300, respectively, it will confirm a bullish momentum in the S&P 500. If they don’t, the S&P 500 breakout could be short-lived. The main risk is that oil continues to advance, expectations of inflation grow, and bond yields climb to 4.5%. This would be bad for gold, put pressure on equity valuations and would put pressure on the dollar again.
In conclusion, markets are not responding to just one narrative. They are coping with two major shocks. Tariffs threaten trade flows. War threatens energy prices. Liquidity is supporting risk assets, but it may not be enough to compensate for higher inflation, yields and trade risks.