Wall Street Wrap: Fed fears, trade impasse weigh on risk appetite

Fed’s independence concerns, lack of breakthrough in trade talks tank markets

Major US indices fell more than 2% overnight as investor sentiment soured amid the ongoing lack of progress in trade negotiations. Optimism appears to be fading, with markets potentially beginning to price for a less favourable outcome. Tough rhetorics from key US trading partners, such as Japan, has underscored the challenges in reaching a consensus, suggesting that talks are likely to drag on for longer. That has cast some doubts on how much meaningful consensus can realistically be reached, with the US facing the task of brokering 75 trade agreements in under 90 days. Japan, in particular, raised concerns over the consistency of US trade positions and dismissed the possibility of a quick agreement.

Adding to the market jitters were fresh concerns about the Federal Reserve (Fed)'s independence. President Donald Trump openly considered whether he has the authority to dismiss Fed Chair Jerome Powell, stoking fears of political interference in monetary policy. This triggered a broad retreat from US assets and a dip in the US dollar, reflecting waning investor confidence. US Treasury yields climbed amid a sell-off in government bonds, with the 10-year yield rising 8.4 basis points (bp) and the 30-year up by 10 bp.

US Dollar: Watching Key Long-Term Trendline Support

The US dollar has slipped to its lowest level since March 2022, weighed down by a broad unwinding of US assets and lingering concerns over US growth risks. Attention now turns to a key long-term upward trendline support near the 96.70 level, which could act as a potential trigger for a slight relief rally. However, any rebound may face a test of resistance at the 99.43–100.26 zone—a previous area of consolidation. Meanwhile, Commodity Futures Trading Commission (CFTC) positioning in the dollar against other G10 currencies is approaching close to levels last seen in September 2024 and July 2023, both of which coincided with modest rebounds in the greenback.

Nasdaq: Broader Downtrend Remains Intact

The recent rebound in the Nasdaq has lost steam, with the formation of a lower high reinforcing the risk of a continued downtrend. Its daily relative strength index (RSI) has also retreated from its midline, indicating that sellers still hold the upper hand. On the macro front, US economic data has been softening more than expected amid tariff uncertainties, with the US economic surprise index at its lowest level since September 2024. Meanwhile, technical conditions have reverted to a more neutral state, removing the oversold element that may previously support the bounce. Looking ahead, the key downward trendline resistance connecting lower highs since February remains a critical hurdle. A decisive break above this level would be needed to revive buyer conviction.

Look Ahead: Global PMIs and US earnings in focus

All eyes will be on flash global Purchasing Managers’ Index (PMI) data this week, as market participants will gauge the impact of ongoing tariff uncertainties. Both manufacturing and services activities are expected to show signs of softening across major economies. In the US, manufacturing PMI is projected to slip into contraction at 49.3, down from 50.2, while the more resilient services sector is forecast to ease to 52.9 from 54.5.

During the last US-China tariff flare-up, global manufacturing PMIs fell below the 50 threshold, with export-driven economies seeing prolonged declines. Much will hinge on whether tariffs are being viewed as short-term to determine if the PMI softness may be transitory, which seems unlikely at this point.

Tesla appears more directly exposed to tariff-related disruptions due to its global manufacturing and supply chain footprint, along with the risks of its operations in China. In contrast, Alphabet may provide insight into the more indirect effects of tariffs—especially around potential shifts in advertising spending amid a softer macro backdrop.