Futures higher, Canada scraps digital services tax - what's moving markets

U.S. stock futures advanced Monday, buoyed by Canada's decision to rescind its digital services tax, which is expected to unblock trade negotiations with the U.S. Meanwhile, the Republican-controlled U.S. Senate commenced debate on a significant tax cuts and spending bill, aiming for a July 4 deadline despite some internal opposition. Economic data showed U.S. consumer spending unexpectedly declined while inflation remained sticky, bolstering market expectations for a Federal Reserve rate cut by September (74% probability). Globally, China's manufacturing activity contracted for a third consecutive month in May, though at a slightly slower pace than anticipated, and crude oil prices edged lower amid easing geopolitical risks and prospects of increased OPEC+ output.

Analysis

U.S. equity futures are indicating a strong open, with the Dow, S&P 500, and Nasdaq 100 futures up 0.6%, 0.4%, and 0.5% respectively, driven by Canada's decision to rescind its 3% digital services tax. This move has been a significant catalyst, removing a key obstacle in U.S.-Canada trade negotiations and directly benefiting U.S. technology firms. The positive sentiment builds on existing market momentum, which saw the S&P 500 and Nasdaq Composite reach all-time closing highs on Friday, with the Nasdaq officially entering a bull market. Domestically, economic signals are mixed; a recent report showed an unexpected decline in consumer spending, yet inflation remains stubbornly above the Federal Reserve's target. This combination has reinforced market expectations for monetary easing, with a 74% probability of a rate cut priced in for September. On the fiscal front, the Senate is debating a substantial tax-and-spending bill that could add an estimated $3.3 trillion to the national debt over a decade, with a vote on passage looming. Globally, China's manufacturing PMI registered 49.7, indicating a third consecutive month of contraction, though the figure was slightly better than forecast and showed a marginal improvement from May, suggesting some stabilization amid ongoing trade tariff discussions. In commodities, crude oil prices have softened on easing geopolitical tensions and the prospect of an OPEC+ output increase.

Key Decisions for Investors

• Given Canada's rescission of its digital services tax and the Nasdaq's entry into a bull market, investors may consider overweighting exposure to U.S. technology-focused equities which are direct beneficiaries of this de-escalation in trade friction.
• Monitor upcoming U.S. economic data closely, as the market's bullish sentiment is heavily predicated on the expectation of a Fed rate cut, a narrative that could be challenged by any unexpected strength in consumer spending or inflation.
• Track the progression of the U.S. Senate's tax-and-spending bill, as its passage could provide a fiscal stimulus but also introduces long-term risk factors related to increased national debt.
• Maintain a cautious stance on assets exposed to global manufacturing cycles, as China's PMI, while better than expected, still signals contraction, indicating that a robust recovery in global industrial demand is not yet secured.