Donald Trump’s 25% auto tariff announcement late on Wednesday ripped across world stock markets overnight, but Wall Street futures held the line ahead of today’s bell as investors questioned just how much more tariff pain is coming next week.
I’ll discuss this and the rest of the market news below before looking at one of the scariest numbers in global finance.
Today’s Market Minute
* Global auto stocks tumbled on Thursday after U.S. President Donald Trump unveiled a 25% tariff on imported vehicles, expanding a global trade war and testing already strained ties with allies.
* Trump said on Wednesday he would be willing to reduce tariffs on China to get a deal done with TikTok’s Chinese parent ByteDance to sell the short video app used by 170 million Americans.
* France’s public sector budget deficit widened last year but not quite as much as the government had expected, official data showed on Thursday.
* Norway’s central bank kept interest rates on hold at a 17-year high of 4.50% on Thursday, in line with most forecasts, as an unexpected resurgence of inflation led policymakers to postpone their previously stated plan for a cut.
* A court order blocking Trump’s freeze on trillions of dollars in government financial assistance will remain in place for now, a federal appeals court said on Wednesday.
Auto tariffs jump the gun
U.S. President Donald Trump jumped the gun on the April 2 “reciprocal” tariff plan, announcing a 25% import levy on all autos and auto parts not made in the United States. He said another wave of tariff announcements was due next week, adding that these would be “very lenient”, but that is likely only relative to the tariffs other countries charge on U.S. exports.
That leaves markets with another week to guess what’s next.
But the auto sector announcement has predictably caused auto and transport stocks to tumble around the world on Thursday, including a 6% after-hours drop in General Motors (GM.N), and a 3% drop in Ford (.F.N),
Counter-threats of retaliatory tariffs have also streamed in, upping the risk of a full-blown trade war. The U.S. imported $474 billion worth of automotive products in 2024, including passenger cars worth $220 billion. Mexico, Japan, South Korea, Canada and Germany, all close U.S. allies, were the biggest suppliers.
Japanese (.N225), and European stock (.STOXXE), indexes retreated 0.6% each, the latter hitting two week lows.
Chinese stocks (.CSI300), (.HSI), bucked the trend, aided by Trump’s suggestion that he would be willing to reduce tariffs on China to get a deal done with TikTok’s Chinese parent ByteDance to sell the short video app. Chinese markets were also boosted by a rally in vehicle giant BYD after it said it would assemble more cars in destination countries.
S&P 500 futures were steady ahead of Thursday’s bell, despite a bruising trading session on Wednesday. But the index’s failure to hold gains back above its 200-day moving average this week has been seen as a worrying sign for trend followers.
In currency markets, the dollar (.DXY), retreated after an initial burst to a three-week high, with the euro rallying after euro zone data showed credit growth accelerating last month.
The dollar was slightly firmer against Japan’s yen , Canada’s dollar and Mexico’s peso . China’s yuan and British sterling inched up, with UK gilt yields climbing to two-month highs following Wednesday’s release of the latest government budget forecasts and plans.
Long-term U.S. Treasury yields climbed to their highest in a month, with the gap between 2- and 10-year yields reaching its widest since mid-January.
While the potentially inflationary impact of tariff rises is the central concern, the Congressional Budget Office also warned that the U.S. government will probably risk defaulting on some of its $36.6 trillion in debt as soon as August – or possibly even by late May – unless Congress acts to raise the nation’s debt ceiling.
And now for today’s deep dive, I’ll look into the latest update on the yawning U.S. investment deficit with the rest of the world.
High-water mark for scary U.S. investment deficit?
One of the scariest numbers in world finance got even more frightening at the end of last year as America’s skyrocketing investment deficit hit new highs. Whether it’s now peaked is perhaps the most important question facing global markets today.
The main thrust of Trump’s global economic policies is clearly directed toward the U.S.’s yawning trade deficit, as he seeks to stop “freeloading” foreign countries from undercutting U.S. producers by overvaluing the dollar, frustrating U.S. exports and relying on American consumers.
Valid or not, next week’s sweeping U.S. import tariff hikes are aimed at correcting that.
Less talked about is the accounting flipside of the U.S. trade and current account shortfalls: the country’s massive capital surplus. America, with its large, liquid capital markets, effectively imports more of the world’s savings than U.S. savers send abroad to Europe, Asia or the developing world.
Put another way, the U.S. Net International Investment Position (NIIP) – or the difference in value between overseas holdings of U.S. assets and all the assets held overseas by Americans – has been ballooning for more than a decade.
According to Wednesday’s update from the U.S. Bureau of Economic Analysis, that NIIP gap hit yet another record high at the end of 2024: $26.2 trillion, a whopping 88% of annual U.S. GDP. While the bulk of that increase was driven by relative price effects, it also involved almost $1.3 trillion of additional net flows to the United States.
The NIIP has been inflated over the past decade not only by insatiable foreign appetite for U.S. stocks, bonds and real estate but also by the massive appreciation of those assets versus smaller gains in the rest of the world.
These stellar returns have, in turn, drawn ever more inflows in a virtuous loop, bolstered by the attraction of U.S. tech innovation alongside the traditional safe-haven allure of U.S. Treasuries.
And it’s been these capital flows rather than the trade gap that have been chiefly responsible for dollar appreciation in the past decade. Reversing these flows could be painful for Americans as it could seriously undermine the asset price inflation that has supported and enriched many.
$30 TRILLION TSUNAMI
Under the hood, the numbers are even more eye-popping.
Total overseas holdings of U.S. assets – or America’s overall liabilities to the rest of the world – increased by almost $8 trillion in the final quarter of last year to a gobsmacking $62.12 trillion. That’s almost twice what it was a decade ago and nearly double the entire U.S. government debt pile.
And it was equities that were doing all the heavy lifting here, not U.S. debt prices that were going in the opposite direction. The value of portfolio equity and investment fund shares jumped by another $676 billion in the final quarter of 2024 to some $18.4 trillion.
Of course, this is all three months out of date, and we know what’s happened since.
The early post-election euphoria around U.S. stocks wore off amid trade war angst, rising geopolitical tensions, surprising German and European defence-related fiscal stimulus and an artificial intelligence breakthrough in China.
The upshot has been that U.S. equities have underperformed the rest of the world by more than 10% in early 2025, having fallen behind European and German benchmarks by almost 20%. In turn, the dollar index has dropped by around 4% since the start of the year.
It will be another three months before we get the full NIIP data for this quarter, but these recent price impacts suggest that we may well see the first turn in the NIIP since the interest rate shocks of 2022.
Even though mutual fund data shows flows into U.S. equities held up reasonably well in the quarter despite Wall Street’s price swoon, there was clearly greater demand for European and Asian stock funds.
Of course, there’s always a chance that any turn in the U.S. investment deficit will be short-lived. The 2022 reversal lasted three quarters before the NIIP started truly exploding.
Next week’s tariff announcements will clearly impact all of this and it’s unclear what plans are actually coming.
What’s not in doubt is the degree to which U.S. markets are knee-deep in foreign investment that’s been increasingly in more volatile equities rather than traditionally stickier fixed income assets.
According to numbers compiled by Apollo Chief Economist Torsten Slok, some 60% of all foreign holdings of U.S. assets are now in equities compared to just 15% in Treasuries. Fifteen years ago, those equivalent shares were 33% and 22%, respectively.
If foreign money continues to turn tail, it could be a rough year ahead for Wall Street. If the NIIP has hit a historic peak, hold on to your hat.
Chart of the day
The Atlanta Federal Reserve on Wednesday updated its closely watched “GDPNow” model. It now shows the U.S. gross domestic product contracting by 1.8% in the first quarter. That’s slightly less of a downturn than prior readings that had spooked Wall Street.
The Atlanta Fed also published an adjusted version that accounts for distortions related to an unusual surge in gold bar imports, something that exaggerated the early-year trade deficit. That gold-adjusted GDPNow model shows a marginal expansion this quarter of 0.2%.
Today’s events to watch
* U.S. Q4 corporate profits, final Q4 GDP revision, weekly jobless claims, February retail/wholesale inventories, February pending home sales, March Kansas City Federal Reserve business survey
* Mexico central bank policy decision
* Boston Fed President Susan Collins and Richmond Fed President Thomas Barkin speak; European Central Bank Vice President Luis de Guindos and ECB policymaker Jose Luis Escrivsa speak
* Ukraine President Volodymyr Zelenskiy meets European leaders in Paris. German Chancellor Olaf Scholz speaks in Paris; German Finance Minister Joerg Kukies speaks in Berlin
* U.S. corporate earnings: Lululemon Athletica
* U.S. Treasury sells $44 billion of 7-year notes
