Recently, the U.S. financial market has experienced a rare "triple blow," with the stock market, bonds, and the dollar weakening simultaneously, leading to a significant decline in investor confidence in American assets. The once dominant belief in "America First" is beginning to waver as funds are rapidly shifting to European and Asian markets, marking a significant change in global capital flows.
"Trump Trade" Recedes, U.S. Stocks Experience Outflows
At the beginning of the year, expectations for Trump's return to the White House drove a rally in U.S. stocks, as investors bet on his tax cuts and tariff policies sparking economic growth. However, market sentiment has shifted dramatically recently due to Trump's erratic trade policies, a tough stance on Ukraine, and government spending cut plans, all of which have undermined market confidence. In addition, weak U.S. economic data has further intensified market concerns.
Meanwhile, Europe's market is receiving positive news. The German government's announcement of a large-scale fiscal spending plan is seen as a crucial policy shift, boosting European stocks, the euro, and European bond yields. Moreover, the rise of Chinese tech companies, especially in artificial intelligence, is prompting global investors to reassess the dominance of the U.S. tech industry.
As a result, the S&P 500 index has fallen from a record high reached less than a month ago and has suffered the largest weekly drop since September 2024. The U.S. stock market's global market capitalization share, which peaked at over 50% at the beginning of the year, has started to decline. In contrast, the Hang Seng Index has surged nearly 20% since the beginning of the year, and European stock performance has outpaced U.S. stocks, with the German DAX index even hitting a record high.
In the tech sector, Tesla's decline this year exceeds one-third, while BYD's sales in the European market have surpassed Tesla's, with its stock price skyrocketing over 25% this year. Tesla's weakness has also dragged down the U.S. "Big Tech Seven," whose combined market value has shrunk by about 11% this year. Morgan Stanley market analysts believe that funds are seeking more attractive investment targets, and market rotation could last six months to a year.
Weaker Dollar, Rising Attraction of European Markets
In the foreign exchange market, the dollar has continued to weaken since hitting a peak in January, recently declining nearly 4%. Adjustments in European economic policy have further boosted the euro, with the euro/dollar exchange rate jumping nearly 5% recently, the best weekly performance since 2009. German bond yields have climbed to their highest levels since 2023, making euro assets more attractive.
The demand for hedging against a rising dollar is declining, while bullish sentiment on the euro has risen to its highest in four years. Some institutions predict that the EU's continued fiscal stimulus could further strengthen the euro, attracting more international capital to European markets.
TJM FX strategy chief Alvaro Vivanco pointed out that global investors are seeking more stable markets, and the appeal of dollar assets is waning, making European and Asian markets more favored.
Decreased Attraction of U.S. Bonds, Safe-Haven Funds Seek New Directions
The U.S. Treasury market has also been hit. Recently, as concerns over the U.S. economic outlook have increased, Treasury yields have been declining, narrowing the yield gap with German bonds to its lowest level since 2023. This indicates that, compared to U.S. Treasuries, the European bond market is becoming more appealing to international investors.
Furthermore, volatility in the U.S. Treasury market has increased, with a measure of Treasury volatility reaching its highest level since the last presidential election day. Some analysts believe that heightened uncertainty in the Treasury market makes investors more inclined to hold safe-haven assets like gold and the yen.
Monica Defend of Amundi Investment Institute commented, "U.S. Treasuries have long been seen as safe-haven assets, but recent high volatility makes investors more cautious." She believes that in the current market environment, gold and the yen might provide more stable safe-haven options.
The instability of the U.S. Treasury market could also affect U.S. corporate financing capabilities. Data shows that European investors account for more than 50% of foreign buyers of U.S. corporate bonds. As European bond yields rise, European funds might reduce their holdings of Treasuries, and the rising cost of hedging back to the euro could further weaken European investors' willingness to buy Treasuries.
Market Outlook: The Trend of Capital Outflows May Persist
Currently, the U.S. financial market's "triple blow" is ongoing. With adjustments in European economic policies, the rise of Chinese tech companies, and concerns about the U.S. economic outlook, the trend of capital outflows may not reverse quickly.
Although the U.S. remains the largest capital market globally, recent capital flows indicate that global investors are reassessing the risks and rewards of assets from different countries. In the coming months, the performance of U.S. stocks, bonds, and the dollar will depend on improvements in U.S. economic data and market expectations for the Federal Reserve's policy direction.
Economists at JPMorgan Chase note that given the uncertainty surrounding U.S. policies, they estimate the probability of the U.S. economy falling into a recession has risen to 40%. In this context, investors may further adjust their strategies regarding U.S. stocks and bonds, while European and Asian markets might continue to attract more global capital inflows.
