By Martin Baccardax

U.S. stocks were powering higher Tuesday as investors looked to rescue their hard-won gains over the final trading days of the month amid optimism that two key concerns are finally getting addressed from officials around the world.

President Donald Trump's latest tariff two-step, which generally begins with an unrealistic threat followed by a magnanimous retreat to allow for negotiations, played out in schematic form heading into the long weekend. His vow Friday to impose a 50% tariff on European goods, which pulled markets sharply lower, was quickly softened with a deadline extension allowing for talks to continue until July 9.

European officials seized on the backtrack, ramping up the pace of their own trade negotiation effort with the aim of putting this to bed before the summer holidays, and investors piled into risk assets once again. Reports also suggested a U.S.-India trade deal, delayed by military tensions in the region, could be close to completion.

Europe's Stoxx 600 benchmark, which has outperformed the S&P 500 by around 8 percentage points so far this year, jumped 0.56% in early trading, while U.S. stocks were on pace to rise more than 1% across the board at the opening bell.

A potentially more powerful effort to drive markets higher, and soothe investor concerns of government profligacy, came from Japan. Officials in the world's fourth-largest economy sent questionnaires to bond traders regarding longer-term debt issuance, a move seen as likely leading to a reduction in new paper and a recognition of broader debt sustainability.

That triggered a massive 20-basis-point decline in 20-year Japanese government bonds, the very same debt that ignited last week's bond market slump, while pulling U.S. Treasury bond yields lower in overnight trading.

Benchmark 30-year bond yields tumbled nine basis points from Friday's close to around 4.968% in early Tuesday dealing, while 10-year note yields fell five basis points to 4.463%.

"While my focus has been on what the U.S. Treasury would do given the persistently large U.S. deficits, Japan is being forced to move more quickly as its debt situation is even more dire and the 'bond vigilantes' were clearly on strike beyond the 10-year maturity in JGB auctions," said Saxo Bank's global head of macro strategy, John Hardy.

Markets don't seem to be looking for some sort of panacea on government debt but they are "waking up to the fact that some paths aren't sustainable", according to Agustin Carstens of the Bank for International Settlements.

Carstens, who runs the central bank for central bank's urged governments to "put their house in order before the public's trust in their commitments starts to fray" during a speech in Tokyo. The timing wasn't lost on a nation that, just hours earlier, lost its status as the world's largest creditor to Germany.

With positive news on trade and a potential recognition of bond market angst, investors, for the moment at least, are prepared to proceed on faith. Faith that slower government spending will at least chip away at the mountains of public debt outstanding. Faith that the world's biggest economies can hammer out an agreement on trade that satisfies the needs of a president determined to rewrite the rules as they negotiate.

And faith the U.S. companies, and their global rivals, can continue to generate earnings growth as they navigate the uncertainty.

JPMorgan strategists, in a note published Tuesday, said they now see the next 300-point move for the S&P 500 as higher rather than lower, citing stable macro data, positive earnings and a "further de-escalation of the trade war,"

" Nvidia earnings loom large as a catalyst with U.S./EU escalated and de-escalated over the course of the weekend," the note added.

Write to Martin Baccardax at martin.baccardax@barrons.com

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May 27, 2025 07:38 ET (11:38 GMT)

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