Global Market Script for the Second Half of the Year: Tariffs Take Effect, No More TACO, Fundamentals Determine Everything

The Trump administration has finalized the tariff rates on major trading partners, eliminating one of the biggest uncertainties in the market. However, the global economy now faces the threat of high tariffs, compounded by disappointing non-farm payroll data, leading Wall Street to collectively focus on the fundamentals.

According to news from the Chasing Wind Trading Desk, Nomura's latest report points out that two major negative catalysts—the finalized, higher-than-expected tariffs and the unexpectedly weak U.S. July non-farm payroll report—have emerged.

Nomura believes that, given the current market positions and valuations are at high levels, this may trigger short-term profit-taking and position adjustments. Investors need to prepare for increased market volatility and pay close attention to subsequent economic and earnings data, as the second half of the year will be a "reality check" for market optimism.

Asian markets, especially Japan and South Korea, which are highly correlated with the U.S. market, will face pressure in the short term. The report clearly states that the upside potential for MSCI Asia (excluding Japan) is very limited by the end of this year.

Tariff Boot Drops: Uncertainty Turns into Real Impact

The U.S. tariff issue that the market has been closely monitoring has finally been settled. The Trump administration has fulfilled its threat without any "negotiation concessions" (TACO - Talk And Cut Offer).

According to real-time estimates from Nomura's U.S. team, the effective tariff rate in the U.S. has risen from 16.3% last week to 17.5%. The specific tariff arrangements have had differentiated impacts on different economies:

Economies with Agreements: The European Union, South Korea, and Japan have received a 15% tariff rate, along with significant investment commitments. The tariff rates for Malaysia and Thailand have been reduced from the expected 24% and 36% to 19%.

New Rates Under Executive Order: The U.S. has imposed new tariffs on other countries that did not reach agreements through executive order. Laos and Myanmar face rates as high as 40%. Surprisingly, Switzerland has also been subjected to a high tariff of 39%.

Unexpected Blow to India: The Indian market has faced a negative surprise with a 25% tariff, significantly higher than the market expectation of 15-20%, along with unspecified "additional penalties." This constitutes a short-term bearish signal for the market.

Other Major Trading Partners: The U.S.-Mexico trade agreement has been extended for 90 days, but Mexico will continue to pay a 25% tariff; tariffs on Brazil will increase to 50% starting August 6; tariffs on Canada will rise to 35%, but most goods are exempt due to the United States-Mexico-Canada Agreement (USMCA).

China-U.S. Negotiations: According to CCTV News, **the U.S. and China held a new round of economic and trade talks in Stockholm, Sweden. According to the consensus reached in the talks, both sides will continue to promote the previously suspended U.S. equivalent tariffs of 24% and China's countermeasures for an additional 90 days **

In addition, a far-reaching regulation is that the United States imposes a 40% transit tax on transshipment goods from all countries. The comprehensive implementation of tariff policies means that market focus must shift from policy games to assessing their real impact on global supply chains and corporate costs.

U.S. Job Market Cools Sharply, Alarm Bells Ringing

The U.S. non-farm payroll report for July shows that the labor market is losing momentum, which starkly contrasts with the market's optimistic expectations.

In July, the increase in non-farm employment was only 73,000, far below Nomura's forecast of 120,000 and the market consensus of 104,000. The data for May and June was revised down by nearly 260,000, bringing the average increase in employment over the past three months down to 35,000, the lowest level since the summer of 2020. The unemployment rate rose to 4.248%, the highest point since October 2021.

Nomura stated that this weak report, combined with already tight market positions and high valuations, could become a catalyst for a short-term market correction. Although Federal Reserve Chairman Jerome Powell took a hawkish stance at the July meeting, the weak employment data undoubtedly increases the risk of the Fed cutting interest rates earlier than expected.

Capital Flows Reverse, Emerging Asian Markets Under Pressure

The report also pointed out that as macro risks rise, signs of a reversal in global capital flows are emerging.

Foreign Capital Ends Continuous Inflow: After seven consecutive weeks of net inflows, foreign investors turned to net selling of emerging Asian stocks (excluding Chinese stocks) last week, with a net outflow of $652 million.

India Hit Hard: The capital outflow was primarily driven by the Indian market. Due to an unexpected 25% high tariff, the Indian secondary market recorded a massive net outflow of $2.2 billion. Offshore ETFs focused on India also experienced their first net outflow in eight weeks.

"American Exception" May Reappear: Globally, emerging market ETFs saw their first moderate net outflow in eight weeks, while offshore ETFs focused on the U.S. recorded net inflows in three out of the past four weeks, indicating initial signs of capital flowing back to the U.S.

Chinese Assets Remain Resilient: Chinese ETFs listed in the U.S. recorded net inflows for three consecutive weeks.

This trend indicates that as global risk aversion rises, capital tends to withdraw from higher-risk emerging markets, with Asian markets, especially India, directly feeling the pressure of capital outflows caused by tariff shocks.

Asian Corporate Earnings Expectations Downgraded, Fundamental Tests Approaching

Data from the second quarter earnings season of 2025 further confirms the challenges facing fundamentals.

Asian Earnings Expectations Weaken: Among the 43% of MSCI Asia (excluding Japan) companies that have reported results, the consensus earnings expectations for the fiscal year 2025 (FY25E) have been downgraded by 1.2% so far this quarter. Nomura expects that earnings across the entire Asian region still have downside potential.

U.S. Earnings Perform Strongly: In contrast, the U.S. market shows resilience. After 66% of S&P 500 companies reported earnings, the year-on-year growth rate for second-quarter earnings reached 10.3%, far exceeding the 6.4% expected a week ago The divergence in profit expectations, coupled with the pressures of tariffs and a slowing global economy, makes the outlook for Asian stock markets more challenging. The report clearly states that the potential upside for MSCI Asia (excluding Japan) from now until the end of 2025 is "very limited." In the second half of the year, the market's driving force will no longer be policy expectations, but rather tangible economic data and corporate profitability