Image Source: Unsplash

The stagflation shivers of Tuesday were back-burnered in a flash—Wednesday opened on a glimmer and closed in a pop of champagne corks. Investors strolled in eyeing the rate-cut candy counter at the Eccles Building, with one hand on the AI jackpot lever, shrugging off Trump’s freshly sharpened tariff sabres and yet another round of underwhelming economic data. Bad news had once again donned its “rate-cut rally” costume, and Wall Street danced to the familiar rhythm of dovish whispers and trillion-dollar tech dreams.

The backdrop was hardly benign. President Trump ratcheted up pressure on key trading partners, slapping an eye-watering 50% import duty on Indian goods and stoking diplomatic frost with Brazil, where President Lula declared U.S. relations at a “200-year low.” Even so, U.S. stocks powered higher. The S&P 500 saw broad-based gains, with consumer discretionary soaring 2.4%—its best day since May.

The animal spirits that powered that rally didn’t materialize out of thin air. They were summoned—once again—by Silicon Valley. Apple surged 5% after the White House confirmed the iPhone titan would increase U.S. manufacturing investment by $100 billion, taking its total commitment to $600 billion over the next four years. It was an old song with a new verse: patriotic capital expenditure as market catalyst. Meanwhile, news that OpenAI is exploring a stock sale at a possible $500 billion valuation poured another gallon of rocket fuel into the AI narrative.

Challenging this market’s momentum right now is like trying to unplug a slot machine mid-payout—irrational or not, the reels are still spinning and the money’s still pouring.

Folks, we have a tech sector that still commands religious conviction.

Even the bond market’s red flags couldn’t slow the charge. A $42 billion 10-year Treasury auction went poorly—the weakest demand in over a year—following a similarly soft three-year sale the day prior. The message was loud and clear: appetite for U.S. debt is waning, and the fiscal backdrop is fraying at the edges.

But in the risk-on world of equity traders, that hardly matters when the narrative is drenched in rate-cut optimism. Yields on short-term paper slid. Fed officials like Kashkari and Daly joined the chorus of caution, suggesting rate cuts could be on deck shortly. Economic bad news was once again deemed good news.

Globally, markets were less convinced. Asian, emerging, and European indices traded flat, weighed down by escalating tariff concerns and the precarious U.S. fiscal position. The exception was China, where blue-chip stocks rallied to their highest level in over three years. There, optimism brewed that the U.S. and China might stitch together a trade accord before the August 12 deadline—one of the few glimmers of diplomatic light in an increasingly hostile global trade environment.

Meanwhile, oil bulls had their legs swept out from under them. Despite a bullish draw in U.S. crude inventories and new sanctions on India over Russian crude purchases, oil prices cratered to two-month lows. The culprit? A swirl of headlines suggesting Trump may soon sit down with Putin for peace talks on Ukraine—a development that traders interpreted as potentially bearish for oil. Trump himself poured gas on the fire in a CNBC interview, saying that if crude falls another $10 a barrel, “Putin’s going to stop killing people,” because “his economy stinks.”

That’s the new geopolitical calculus in the oil market: sanctions, supply, and now, Trump’s diplomacy. Even with U.S. refiners running full tilt—the most since 2019—oil sold off, spooked by the possibility of a Trump-brokered ceasefire and a White House that wants lower energy prices to reap the political optics and offset the onset of the tariff-induced inflation.

Thursday brings new tests: China’s July trade numbers, with expectations for slower exports and a narrowing surplus, followed by the Bank of England's rate decision. A 25 bp cut is widely expected, but the U.K.’s worsening fiscal outlook and inflation still running above target make for a dangerous policy cocktail. Meanwhile, the final leg of this week’s Treasury supply—a $25 billion 30-year auction—will be watched like a hawk for signs of demand fragility.

Yet none of this derailed the U.S. equity rally—not yet. The market, once again, chose its preferred narrative. Tariffs? Transitory. Bond auctions? Noise. AI, Apple, and accommodative policy? That's the melody, and investors are still dancing.

It’s a dangerous kind of confidence—the kind that swells before reversals. But for now, yesterday’s stagflation jitters gave way to a high-wire risk bid by the close, with traders seemingly immune to the gathering storm clouds. On Wall Street these days, it doesn’t take much to revive animal spirits. Just whisper “rate cut,” flash a trillion-dollar tech headline, and the market will gladly forget it ever had a reason to worry.

More By This Author:

Stagflation Static
Dancing With Doves: Wall Street Finds Its Rhythm In The Repricing
Asia Shudders As Cracks Form In The Teflon U.S. Economy