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A historic global trade war, a proposed $1.2 trillion European fiscal bazooka and the emergence of China as tech race leader are upending global flows of money, marking a potential turning point for investor capital away from the United States.
China unlocked more stimulus on Wednesday and promised greater efforts to cushion the impact of an escalating U.S. trade war. Hours earlier, Germany’s likely next government agreed on the biggest overhaul to fiscal policy since the country’s reunification.
In response, German bonds cratered in the most dramatic selloff in decades, as 30-year yields shot up by a quarter of a percentage point on Wednesday, with the selloff entering a second day on Thursday.
Meanwhile, U.S. economic data points to a weakening, and the trade war unleashed by U.S. tariffs that kicked in this week is hurting sentiment inside and outside the world’s biggest economy.For most of the last three years, investors had bet on “U.S. exceptionalism,” with the country ahead of others in economic growth, stock prices, artificial intelligence and other areas.
“The world now sees the U.S. model is changing, and saying – we need to adapt to that, the U.S. is no longer as reliable as a trade partner, we have to take care of our own needs on defence,” said Tim Graf, head of macro strategy for EMEA at State Street Global Markets.
The change in sentiment has fuelled a rare divergence in global stock markets.
While the S&P 500 stock index is down 1.8% this year, European shares are up almost 9% at a record high, and tech stocks in Hong Kong have surged almost 30%.
The euro shot to a four-month high above $1.07 and a number of banks have raced to ditch their recent calls for a drop to parity against the dollar.
Investors have chopped their bullish bets on the dollar in half to around $16 billion since U.S. President Donald Trump’s inauguration in January, based on weekly data from the Commodity Futures Trading Commission.
“Go back to December, this overwhelming consensus about U.S. exceptionalism, and U.S. was the only place to invest,” said Dario Perkins, managing director of global macro at TS Lombard, an economic consultancy.
“What’s really happened here is this threat of tariffs and the aggressiveness of Trump is forcing other countries to spend more.”
In his first 44 days in office, Trump has ripped up the playbook on foreign relations in place since 1945, launched a global trade war by slapping tariffs on his country’s largest trading partners and forced European leaders to drastically rethink how they fund their own security.
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Tariffs and trade uncertainty are causing the U.S. economy to lose steam, and companies more vulnerable to slower growth are starting to show the cracks.
An index of U.S. banks has lost 8% in the last month, while its European equivalent has jumped 15%.
Investors have poured money into Europe to diversify away from the U.S. market.
Spending Big
With Europe and China poised to spend big, the dollar is looking less appealing.
“We had been long the dollar against the euro and closed that position over a week ago. It had lost impetus,” said Mark Dowding, chief investment officer at RBC’s BlueBay fixed income team. “The behaviour of Trump has diminished the appeal for U.S. assets in general.”
After investors dumped Chinese assets last year, as the economy slowed and affluent consumers were closing their wallets, the government took several steps to encourage domestic spending. But many still viewed China as uninvestable in the absence of a jumbo stimulus plan as strains lingered from a real-estate bubble that burst, hitting companies and homeowners.
Almost uninterrupted outflows from China-focused funds after Trump’s election win in November reversed in early February, drawing in some $3 billion since then, according to Lipper data.
One of the great U.S. stock market draws has been its megacap tech shares. Nvidia, in particular, has become the poster-child of the AI investment revolution and one of the world’s most valuable companies.
There was little evidence to suggest any serious challenge to the dominance of Wall Street in the AI arms race until late January, when a previously unknown low-cost Chinese AI model burst onto the scene.
The emergence of DeepSeek not only shattered assumptions about the cost and efficiency of the race to build out AI, but of how close behind Western companies China really was.
Hong Kong-listed tech stocks have roared 24% higher since January 27, while a basket of U.S. tech megacaps has dropped 12%.
Yang Tingwu, vice general manager of asset manager Tongheng Investment, said China’s stock market is already immune to higher U.S. tariffs as the country’s growing strength is underpinning domestic assets.
“If you look at TikTok, Xiaohongshu or DeepSeek, China’s technological clout is expanding,” Yang said.
American users have been rapidly moving to Xiaohongshu, a Chinese social media platform known as RedNote in English, in response to the impending sale of rival TikTok’s U.S. operations.
Still, for some, a resilient U.S. economy and relatively higher interest rates will see the dollar retain its appeal over time.
“I do think there is a shift in play, we view it as a tactical versus a big secular shift,” said Nate Thooft, CIO for Multi-Asset Solutions and Global Equities at Manulife Investment Management. He has recently upgraded a maximum underweight on European equities to neutral.
(Additional reporting by Yoruk Bahceli in London, Tom Westbrook in Singapore and Samuel Shen in Shanghai; Editing by Elisa Martinuzzi and Richard Chang)
