Global markets pull back as tariff optimism fades, dollar weakens, and inflation in focus

After a strong rally fueled by hopes of a tariff truce between the US and China, global markets began to consolidate as investor focus shifted toward inflation data, earnings resilience, and policy execution risks. Confidence in Europe picked up, but doubts resurfaced around the sustainability of the dollar’s rebound and the implications of the Trump administration’s aggressive move on drug pricing.

US markets pause as inflation data looms

US equity futures slipped as investors awaited key inflation data expected to reflect the first round of cost pressures tied to the recent tariff regime.

• S&P 500 futures: -0.3%
• Nasdaq 100 futures: -0.4%
• Dow Jones futures: -0.2%
• Gold rose 0.6% to $3,254/oz as investors rotated into havens
• 10-year Treasury yield: -2 bps to 4.45%

The pullback comes after Monday’s surge, where the S&P 500 closed up 3.3% and the Nasdaq 100 re-entered a bull market.

Germany sees jump in investor sentiment

German investor confidence surged as tariff relief improved the economic outlook and the country’s new government prepared a major fiscal push.

• The ZEW expectations index rose to 2 in May, from -14 in April – a dramatic rebound.
• The reading beat expectations significantly, suggesting optimism is building around the possibility of reduced US-EU trade tensions and a pickup in domestic investment.

That said, households and firms remain cautious, with some investment postponed pending clarity on broader trade talks.

Dollar’s rally hits resistance as option markets turn bearish

The US dollar’s strong one-day rebound following the US-China tariff truce met resistance Tuesday, with option markets signaling persistent doubts:

• Bloomberg Dollar Spot Index: -0.2%
• Option market positioning now skews slightly bearish, with $61 billion in notional bearish bets, outweighing $55 billion in bullish trades.

The rally, driven by reduced recession fears, lacked follow-through. Hedging demand against dollar strength remains limited, especially against growth-sensitive currencies like the yuan, euro, and Norwegian krone.

Despite trimming short exposure, hedge funds are not aggressively betting on further upside. Long-term conviction on the dollar remains muted amid lingering geopolitical risks and the prospect of stagflation.

Trump’s drug price policy continues to pressure pharma sector

President Trump’s commitment to enforce a “most-favored-nation” pricing model for prescription drugs weighed further on healthcare equities:

• He vowed to cut prices by “59%, PLUS!” via executive order, aiming to match the lowest global prices.
• Details remain sparse, but the policy could impact pricing for drugs reimbursed by Medicare and Medicaid, which make up ~40% of US drug sales.

Market impact:

• Pfizer, Eli Lilly, Merck, and Bristol-Myers continue to trade lower
• Novo Nordisk, Sanofi, AstraZeneca underperform European peers
• Japan’s Topix Pharma Index saw its steepest drop since August

Investors remain focused on whether this move applies only to federal programs or expands further. Some expect revenue pressure to mount across the board.

Goldman raises S&P 500 target despite tariff risks

Goldman Sachs raised its 12-month S&P 500 target to 6,500, up from 6,200, reflecting renewed optimism over recession risk and trade dynamics:

• “Buy America” flows are expected to benefit domestically focused equities
• Caution remains around earnings growth due to still-elevated input costs
• Companies with strong pricing power are expected to outperform

Despite the upgrade, Goldman emphasized that tariffs will likely remain higher in 2025 than in 2024, keeping pressure on margins.

After the euphoria around tariff de-escalation, markets are returning to fundamentals. Inflation data and policy execution risks are now in focus. The dollar’s rally looks fragile, sentiment in Europe is improving, and US healthcare faces regulatory overhang. It’s a market still full of opportunity—but one that demands selectivity, vigilance, and strategic hedging.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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