Japan is experiencing it big time. Trade negotiations appear to be stuck over Japan’s unwillingness to buy Uncle Sam’s rice. Tokyo now risks being slapped with 30–35% tariffs. Meanwhile, the EU seems willing to accept 10% tariffs in exchange for some exemptions—if that’s Trump’s will.

To top it off, yesterday’s US data did little to support those betting on an imminent Federal Reserve (Fed) rate cut. Most FOMC members still argue that cutting rates now would be a mistake, particularly as they expect inflation to rise due to tariffs in the coming months, and the labour market remains robust enough to wait. In fact, US job openings unexpectedly rose in May, the ISM Manufacturing Index showed slower contraction, and price pressures edged higher in June.

The combination of better-than-expected jobs and activity data with stronger-than-expected inflation reads like this in plain English: the Fed shouldn’t rush into rate cuts.

For now, the most reasonable scenario is that inflation will start to rise, and the data is pointing in that direction. That message is finally—if slowly—sinking in, even among some of the Fed doves. US 2-year yields rebounded after hitting the 3.70% mark, but the probability of a July cut, which looks increasingly unlikely, still stands at around 21% this morning. The base case remains two cuts from the Fed this year. That leaves room for a further hawkish adjustment—which could bring July cut expectations to zero and two-cut expectations to one. That, in turn, should push the 2-year yield higher and slow - or reverse - the equity rally heading into the earnings season.

Today, investors are focused on the US ADP employment report. The US is expected to have added 99,000 new nonfarm jobs in June. A weaker-than-expected figure could offer short-term support to the Fed doves—though arguably it shouldn’t. A stronger-than-expected print, on the other hand, could further demoralize the dovish camp and accelerate the long-overdue hawkish repricing in Fed expectations. And the bigger the gap between expectations and reality, the more violent the correction, and the sharper the potential selloff.

Other red flags:

• US equity valuations have risen while earnings growth expectations are trending lower. While this may set the bar lower for beats, and the weaker US dollar could boost USD-denominated earnings, markets seem to be overlooking the risk that trade chaos may have caused deeper disruption to supply chains and production lines.
• US debt. Trump’s latest tax bill just scraped through the Senate with one vote and now heads to the House. It comes with a $3 trillion price tag—set to be financed on the backs of the bottom 20% losing benefits like Medicaid.

The more risks we sweep under the rug—and the wider the gap between valuations and fair value—the greater the size of a potential correction. And while seasoned traders know that markets rebound eventually, a big enough selloff could trigger margin calls and forced liquidations, leading to realized losses. In short, the risk of a selloff remains very real.

In individual stock news: things got spicy. Tesla dropped more than 5% yesterday after Elon Musk criticized climate subsidies and publicly clashed with Trump—perhaps forgetting that while he may be an ex-friend, Trump is also the President. Trump fired back, claiming Tesla wouldn’t exist without subsidies and is reportedly reviewing Musk’s immigration status (he’s originally from South Africa and now a naturalized US citizen). It’s absurd on many levels—but also, sadly, not surprising.

As I’ve said before: buying Tesla for Musk has never been a sound investment thesis. His souring relations with the White House could also hit Tesla’s robotaxi ambitions, as these depend on regulatory flexibility—something the administration may be less willing to offer in a political spat.

Meanwhile, competitors like BYD are capitalizing. The Chinese EV maker posted its best month of car sales this year, pushing H1 volumes past 2 million. BYD’s stock is hovering just below its 100-DMA, and the PE ratio stands at 21. The company remains a compelling addition to a globally diversified equity portfolio.