De-escalation of trade tensions, dovish Fed comments, Alphabet earnings boost appetite

Yesterday allowed global risk investors to take a deeper breath. Dovish comments from Federal Reserve (Fed) members, and de-escalation of trade tensions between the US and China allowed a further recovery in global equities. Optimism was backed today by the Chinese announcement that it is considering easing tariffs on some US imports, further signalling de-escalation of trade tensions and supporting earlier comments from the Trump administration that triple-digit tariffs could come ‘substantially’ down. As a result, the Chinese CSI 300 is better bid this Friday, while the Hang Seng Index in HK is up nearly 1.50% at the time of writing. Part of the optimism is due to de-escalation of trade tensions, and part is due to Politburo’s reiteration of pro-active fiscal and supportive monetary stimulus to support the economy.

Turning dovish?

In the US, a few Fed members have started to lower their guard. Christopher Waller said he would support rate cuts if jobs are affected, and Beth Hammack indicated that the next Fed cut could arrive as early as June if there’s clear evidence of a US economic downturn. If Atlanta Fed’s GDP Now forecast is any indication, the US economy could post a 2.5% decline in Q1, down from 2.4% in Q4. Activity in Fed funds futures shows a more than 60% chance of a June rate cut.

The risk is the inflation outlook for the US is uncertain. If the economic slowdown doesn’t temper inflationary pressures, rising inflation from tariffs will limit the Fed’s scope for action. For now, however, market movements suggest investors are optimistic the Fed will act sooner rather than later. The US 2-year yield—best capturing Fed expectations—stands below 3.80% this morning compared to around 4.40% at the beginning of the year. But we sense that companies will try to pass tariffs on to their clients. Giants like P&G and Unilever warned this week: Unilever beat estimates in Q1 by raising prices, and P&G’s CEO said the company will ‘likely’ raise prices due to higher tariffs. Now, all eyes are on inflation and employment figures to determine what the Fed should do and how much they could ease pressure.

In Europe, the situation is different. Falling energy prices and a cheaper US dollar make the inflation outlook much softer than in the US, and softening inflation means the European central banks could continue cutting interest rates to support their economies, which are poised to slow down due to rising trade tensions. On the other hand, European government spending on security and infrastructure will likely boost prices in limited areas and won’t generate broad-based price pressure. As such, the diverging inflation outlooks for the US and Europe—and the idea that European economies will take a softer hit—support the euro against a broadly weakened US dollar. Though, the pair is struggling to find buyers into the 1.14 mark, as there’s growing fear that a too-strong euro could hurt European economies: 60% of the Stoxx 600's sales come from abroad and melt when converted back to euros. So far, the earnings season in Europe has been inconclusive. Luxury companies posted disappointing results, while tech results were mixed, with strong growth from SAP but significantly lower bookings from ASML.

Across the Channel, the FTSE 100 is outperforming the Stoxx 600. Miners are performing well. Fresnillo, for example, is up nearly 80% since the beginning of the year, while Antofagasta is up more than 30% since its April dip, as copper futures rally despite a gloomy global outlook. This rally is explained by a weaker dollar, Chinese stimulus, supply constraints, and perhaps increased buying before tariffs. Easing trade tensions could further boost appetite for the UK’s energy- and commodity-rich FTSE 100.

In the US, the selloff appears to have eased this week, and the first glance at tech earnings wasn’t that bad. Tesla did poorly for political reasons, but Netflix beat estimates, and Google—who announced its latest results yesterday after the bell—showed better-than-expected revenue growth for both its advertising and cloud segments, justifying the company’s AI spending plans. This gave AI investors a timid smile, indicating that the AI theme isn’t dead—it’s just been overshadowed by Trump’s trade news. As a result, Alphabet jumped more than 4.5% in after-hours trading and could break free from its year-to-date bearish trend. If all goes well, today’s post-earnings jump in Alphabet could push its share price above the critical 38.2% Fibonacci retracement of this year’s slump, into the medium-term bullish consolidation zone. The idea that AI is helping boost revenue and justify spending should also fuel appetite in AI enablers like Nvidia, diverting attention from the tariff war for a while.

As such, Nasdaq futures are leading gains this morning, and sentiment across major markets suggests that the week will likely end in a better mood than when it started! Let’s cross our fingers that the weekend news don’t spoil the latest optimism.