A Look at the Day Ahead in U.S. and Global Markets from Mike Dolan

U.S. Treasuries experienced a rare lift on Tuesday as speculation surrounding Donald Trump's pick for Treasury Secretary focused on Kevin Warsh, coinciding with a geopolitical safety bid sparked by nuclear threats from Russia.

Safety trades emerged early in Europe after Moscow responded to Washington's decision allowing Ukraine to use U.S.-supplied weapons against Russian territory. Sovereign debt, gold, and Japan's yen rose while European stocks and the euro declined, following reports that Russian leader Vladimir Putin had updated Moscow's military policy and nuclear doctrine, suggesting a potential nuclear response to conventional missile attacks supported by nuclear powers.

Despite the severity of the threat, the market's reactions have been relatively modest, as Putin has consistently threatened nuclear action since Russia invaded Ukraine a thousand days prior. The most significant market movement was a sudden drop in Treasury yields, which had previously been boosted by Trump's tax and tariff proposals, persistent inflation, and diminished Federal Reserve easing expectations.

Two-year yields fell to their lowest in 11 days, while 10-year yields dropped below 4.35%. Normally, this would weaken the dollar, yet the safety bid, particularly against the euro, strengthened the dollar index.

Before Putin's recent threats, Treasuries had already been declining due to Warsh emerging as a strong candidate for Treasury Secretary in betting markets, with a 44% chance of nomination according to Polymarket. Warsh, a former Fed governor and economic policy adviser, has a hawkish record on inflation and deficits.

Despite mixed sentiments about Trump's cabinet, Warsh is viewed as a familiar face who understands macroeconomic issues and respects the Fed's independence in monetary policy.

In a broader context, a risk-off sentiment prevailed, with euro stocks falling over 1% and nearing three-month lows amid fears of a global trade war. Bank of Italy’s Fabio Panetta emphasized the need for the European Central Bank to focus on sluggish economic growth.

In Asia, trade concerns initially caused a dip in China’s markets, but they rebounded before closing. China’s central bank is expected to maintain its benchmark lending rates, impacting banks' profitability amid new tariff threats from Trump.

On Wall Street, stock futures were down in line with the negative global mood. Nvidia's results on Wednesday are expected to attract attention, while Walmart’s update later on Tuesday will provide a retail perspective.

Major investment banks are also releasing year outlooks, with Goldman Sachs projecting the S&P 500 to rise another 10% by the end of 2025, aligning with Morgan Stanley's expectations based on U.S. economic and corporate growth.

Key developments to watch for U.S. markets later on Tuesday include:
– U.S. October housing starts and permits
– Canada’s October CPI inflation
– G20 leaders summit in Rio de Janeiro
– Speech by Kansas City Federal Reserve President Jeffrey Schmid
– U.S. corporate earnings: Walmart, Medtronic, Keysight Technologies, Jacobs Solutions, Lowe's, etc.

By Mike Dolan, edited by Mark Heinrich