Global Risk Monitor: Weekly Update – May 16

Financial markets continued to rebound this week, buoyed by temporary trade de-escalations and looser financial conditions. However, beneath the surface of this rally lies a landscape of historically elevated valuations and persistent uncertainty. Market participants should temper optimism, as the sustainability of recent gains remains highly contingent on volatile policy developments and fragile macroeconomic signals.  Nevertheless, it feels like the FOMO crowd wants to challenge the all-time highs made in February.

Euro Banks

European banks, often overlooked in recent years, have delivered an unexpected year-to-date return of 33% in euro terms, with an added 7% benefit from currency movements. Their outperformance, by over 40% relative to NVIDIA, for example, would have been dismissed as implausible and crazy at the start of the year. 

Semis

The semiconductor sector led with outsized gains, with its SMH ETF advancing 10% this week and 16% in May. Renewed demand for AI infrastructure and chip exports contributed to this performance. Nonetheless, such sharp movements in high-beta sectors raise concerns about potential overextension, particularly in a market where overall valuations, such as the S&P 500’s forward price-to-earnings ratio of 22, already stand at historically elevated levels.

Fed Cut Pushed Out

The Federal Reserve’s decision to delay rate cuts has pushed out market expectations for the first cut at the September 17 FOMC meeting, with the second cut expected in  December. Despite recent inflation readings coming in below expectations, the Fed appears unwilling to declare victory prematurely. Treasury markets reflected this prudence: the 10-year yield breached 4.5% this week, rising 32 basis points in May alone. While narrowing credit spreads may suggest improved sentiment, they could also reflect a mispricing of lingering risks.

Trade Risk Still On the Table

Complicating the macro outlook further are renewed trade tensions. President Trump announced that the U.S. will soon issue letters unilaterally setting new tariff rates for hundreds of countries, citing the impracticality of individualized negotiations.  Markets may interpret this as a signal that the negotiation process is proving more contentious than anticipated. This blunt and unilateral approach injects further uncertainty into the global trade environment and could prove destabilizing if retaliatory measures follow.  There is no question tariffs are headed higher from already historically elevated rates. 

Japan’s position in the ongoing trade saga is illustrative of broader tensions. Facing domestic political challenges, Tokyo has hardened its stance, resisting any agreement that fails to deliver meaningful relief on the 25% U.S. auto tariff. While this impasse may delay resolution, it also reflects a pragmatic effort to avoid structurally imbalanced outcomes. The Japanese government is seeking to protect critical industries while engaging in high-stakes diplomacy with a U.S. administration increasingly focused on unilateral action.

Markets have moved on from the tariff debacle, but we say not so fast. 

Keep this on your radar, folks.

Germany and Spain Über Alles

European equity markets, particularly in Germany and Spain, are among the stronger performers year-to-date, aided by robust industrial output and a 7% currency gain for unhedged foreign investors. However, the durability of this momentum is far from assured, especially as broader global demand remains uneven and subject to policy disruption.

Crude Oil and Gasoline Divergence

Commodities present a mixed picture: crude oil prices have fallen 13% year-to-date, while wholesale gasoline prices climbed 7%, reflecting possible supply chain inefficiencies or seasonal demand effects. These divergences add complexity to inflation forecasts, which remain central to monetary policy decisions.  Furthermore, the political dividend of a drop in crude oil prices is almost completely cannibalized by the surprising increase in gas prices. 

Apple and Consumer Sentiment

Apple saw renewed investor interest, a potentially positive sign for consumer tech sentiment. Yet, such gains may also reflect momentum-driven positioning rather than fundamental improvement, particularly as consumer sentiment remains weak. The University of Michigan’s May index fell for the fifth consecutive month, with inflation expectations climbing—further highlighting the disconnect between soft data and asset pricing.

Easing Financial Conditions

Although financial conditions eased significantly in May, as reported by the Chicago Fed’s NFCI, the breadth and quality of this easing merit scrutiny. Much of the recent rally has been driven by multiple expansion rather than earnings growth, suggesting vulnerability if macro data or geopolitical developments disappoint.

In sum, while financial markets have posted strong returns in May, this strength masks underlying fragility. With valuations stretched, geopolitical risks intensifying, and macroeconomic signals mixed, a neutral to slightly bearish outlook is warranted. Investors should remain vigilant, as the path forward is likely to be shaped more by volatility and policy missteps than by sustained fundamental momentum.   That said, the momentum whores (of which, we are one at times) have taken control of the markets and it wouldn’t be a surprise to see a continued move to the old highs. 

Markets U.S. Market Analysis

Markets Rise on Trade Optimism
U.S. equities rebounded sharply as the White House and Beijing reached a 90-day tariff suspension, with U.S. tariffs on Chinese goods lowered from 145% to 30%, and China reducing its tariffs from 125% to 10%. This temporary reprieve lifted risk sentiment and propelled major indices upward:

• Nasdaq Composite: +7.15%

• S&P 500: +5.27%

• Dow Jones Industrial Average: +3.41%

• Russell 2000: +4.5%, still down 5.3% YTD

Investor Sentiment Remains Cautiously Bullish
While the rally broke key technical levels (e.g., Nasdaq and S&P 500 moving above their 200-day SMAs), gains were underpinned by short covering, underexposure, and tactical positioning rather than fundamentals. Despite these technical wins, market breadth remains uneven and valuations stretched, with the S&P 500 trading at a 22x forward P/E—above historical norms.

Tariff Volatility Still a Risk
Although trade tensions with China have temporarily eased, no long-term agreement has been reached. The path of tariffs remains fluid, and uncertainty continues to weigh on capital expenditure and production decisions, particularly among small businesses and manufacturers.

Global Market Analysis

Europe Responds with Diplomacy
European stocks followed U.S. markets higher. Germany’s DAX (+1.14%), France’s CAC 40 (+1.85%), and Italy’s FTSE MIB (+3.27%) rose as optimism grew around renewed trade talks. Germany’s industrial output (+3.1% in March) and a record eurozone trade surplus (EUR 36.8B) offered support.

Germany Seeks Trade Reset
Calls for a structured, zero-tariff trade framework by German officials aim to restore competitiveness and regulatory alignment. This reflects Europe’s attempt to play a stabilizing role in global trade while avoiding direct confrontation.

China Not Yet Aligned
Chinese stocks rose modestly (CSI 300 +1.12%, Hang Seng +2.09%) as the trade reprieve met nearly all of Beijing’s demands. However, the easing of tensions also reduced pressure on Beijing to announce major stimulus, tempering equity gains.

Economics U.S. Economic Overview

Tariff Intentions Still Unclear
Markets remain uncertain whether tariff policy is aimed at reshoring supply chains, extracting concessions, or supporting fiscal goals. With the pause in place, attention has shifted to whether similar concessions will be made with the EU or Japan.

No Formal Progress with China
Despite the 90-day pause, the deal lacks structural reform commitments. Consumers and businesses remain wary, as the effective tariff level of 30% is still significantly elevated relative to pre-April rates.

Price Pressures on Horizon
April’s CPI rose 2.3% YoY and core CPI held at 2.8%, both below expectations. PPI fell 0.5% MoM, driven by margin compression. However, forward inflation expectations surged:

• 1-year inflation expectations: 7.3% (highest since 1981)

• 5–10-year expectations: 4.6% (highest since 1991)
  Consumers increasingly cite tariffs as a dominant economic concern.

Retail Sales and Sentiment
Retail sales slowed to +0.1% MoM, with weakness in autos, sporting goods, and apparel. Sentiment plunged to the second-lowest level on record (University of Michigan Index: 50.8), highlighting deep consumer unease.

Global Economic Overview

Germany Advocates Efficiency Through Free Trade
Eurozone industrial production rose 2.6% in March, the fastest in two years. Employment also accelerated. Germany argues that tariff reduction could preserve industrial competitiveness and supply chain integration.

Structural Conflict with U.S. Goals
U.S. trade policy—focused on tariffs as revenue and domestic stimulus—clashes with Europe’s zero-tariff, rules-based approach. Tensions could rise if no common framework is agreed.

Europe Seeks Stability Before Recession Risk Builds
The ECB is in no rush to cut rates, citing improving growth data. However, risks from prolonged trade disputes, particularly if the U.S. targets auto tariffs, remain elevated.

Week Ahead: May 19–23, 2025 Economic Data Releases

• Monday, May 19

  • No major U.S. economic data scheduled.

• Tuesday, May 20

  • Eurozone Inflation (April Final): Final figures for April’s consumer price index (CPI) will be released, providing insight into inflation trends within the Eurozone.

• Wednesday, May 21

  • U.S. Existing Home Sales (April): Data on existing home sales will offer a snapshot of the housing market’s performance during the spring selling season.

• Thursday, May 22

  • U.S. Initial Jobless Claims (Week Ending May 17): Weekly data on unemployment claims will indicate the health of the labor market.

  • U.S. New Home Sales (April): Figures on new home sales will provide further insight into the housing sector’s condition.

• Friday, May 23

  • U.S. Flash PMI (May): Preliminary Purchasing Managers’ Index data for manufacturing and services sectors will shed light on business activity and economic momentum.

Corporate Earnings Reports

• Monday, May 19

  • Trip.com: Expected to report a nearly 10% decline in earnings per share (EPS) to $0.75, with revenue growth of approximately 17% to $1.92 billion.

  • Qifu Technology: Anticipated to post a 71% increase in EPS to $1.72, with an 11% rise in revenue to $637 million.

• Tuesday, May 20

  • Home Depot: Analysts expect a 1% decline in EPS and an 8% drop in revenue, reflecting challenges in the home improvement sector.

  • Gap Inc.: Projected to report a 7% increase in EPS to $0.44, with sales growth of less than 1% to $3.41 billion.

  • Workday: Expected to announce a 15% rise in EPS to $2.01, with revenue increasing by 11% to $2.22 billion.

  • Keysight Technologies: Forecasted to report a 17% increase in EPS to $1.65, with a 5% rise in sales to $1.28 billion.

• Wednesday, May 21

  • Target: Anticipated to see a 19% decline in EPS to $1.65, with a 1% decrease in sales to $24.28 billion, amid slowing traffic and tariff concerns.

  • Lowe’s: Expected to report a 5.5% drop in EPS and a 2% decline in sales, reflecting challenges in the retail sector.

  • Urban Outfitters: Projected to post a 21% increase in EPS to $0.84, with revenue growth of 7.5% to $1.29 billion.

  • TJX Companies: Forecasted to report a 5% decline in EPS to $0.91, with a 4.2% increase in revenue to just under $13 billion.

  • Baidu: Expected to see a 28% decline in EPS to $1.98, with a 1.5% decrease in revenue to $4.3 billion.

  • XPeng: Anticipated to report a loss of $0.20 per share, with revenue surging 130% to $2.075 billion, driven by strong demand for its Mona 03 model.

• Thursday, May 22

  • Ralph Lauren: Projected to report a 19% increase in EPS, with approximately 5% sales growth for its Q4 results.

  • Burlington Stores: Expected to announce EPS of $1.42, with revenue rising 7% to $2.65 billion.

  • BJ’s Wholesale: Anticipated to post an 8% increase in EPS, with a 5.4% rise in revenue.

  • Analog Devices: Forecasted to report a 21% increase in EPS to $1.70, with sales up 16% to $2.51 billion.

  • Autodesk: Expected to announce a 15% rise in EPS to $2.15, with a 13% increase in sales to $1.61 billion.

  • Intuit: Projected to report a 10% increase in EPS to $10.90, with sales rising 12% to $7.56 billion.

  • Atour Lifestyle: Anticipated to post a 6 cent increase in EPS to $0.32, with 28% revenue growth to $261 million.

• Friday, May 23

  • No major earnings reports scheduled.

Global Events and Developments

• May 20–22: G7 Summit in Banff, Canada

  • Finance ministers and central bankers will convene to discuss global economic challenges, including trade policies and currency volatility.

• May 21: Google I/O Conference

  • Alphabet is expected to unveil new AI-related products and updates, potentially impacting the technology sector.

• May 19: UK-EU Summit

  • A summit between the UK and EU is anticipated to address post-Brexit relations, with potential implications for trade and economic policies.

Source: https://global-macro-monitor.com/2025/05/17/global-risk-monitor-weekly-update-may-16/