Market warp: From sugar high to sideways, markets exhale after tariff truce rush

Risk takes a breather as tariff fog settles over markets

After a week packed with headline fireworks and sharp moves, Friday’s price action felt more like the market exhaling. The dollar slipped for a second straight session, U.S. equities came off their highs, and traders leaned into classic end-of-week caution. Nothing sinister—just the familiar rhythm of profit-taking after a seven-day global equity rally, with investors waiting for the next real catalyst to step in.

The US-China tariff truce delivered an early-week sugar high, pushing global risk appetite to levels not seen since February. But now that the adrenaline has worn off, markets are left grappling with a simple but critical question: where will these tariffs actually settle? Will the White House lock in a headline-friendly 10% effective rate—or let the hawks push it north of 15%? What’s clear is that for China markets, the base case remains closer to 30%, and that’s a hard pill to swallow, especially with U.S. data holding up just well enough to kill the Fed-cut dream.

Asian equities reflected this uneasy optimism, poised to wrap up an otherwise strong week on a softer note. The narrative has shifted from tariff panic to tactical digestion. Stocks aren’t tanking—they’re catching their breath. Investors are rotating rather than retreating, as evidenced by the subtle drift into defensives and profit-booking on big tech winners.

The FX tape mirrored that tone. The greenback gave up more ground, slipping against majors with haven flows favoring the yen and Swiss franc. The U.S. 10-year yield edged lower again after Thursday’s 10 bp drop, as traders continue to price in two Fed cuts this year—fueled by this week’s downside surprises in U.S. data. Aussie and Kiwi yields followed suit, drifting lower in sympathy.

Our USDJPY short got pinched slightly this morning on a worse-than-expected Japan GDP print. But we’re holding the view. U.S. tariffs are unlikely to stick at punishing levels for Japan, and we still see the BoJ-Fed policy divergence playing out. The 140 handle remains in view once the Fed resumes cutting and yield spreads reassert themselves.

As for Trump’s fast-track AI diplomacy blitz in Saudi Arabia and the UAE—this isn’t just about optics. It’s a statement of intent: the trade war isn’t being fought over soybeans or sneakers anymore. It’s being waged on the technology front—AI chips, quantum infrastructure, AI sovereignty. And that’s where this gets geopolitically messy. China isn’t just watching the Middle East pivot—they’re reading it as a declaration that tech alignment will define the next decade’s global alliances.

Bottom line: Markets aren’t panicking. But they’re clearly rotating into neutral, waiting to see whether this tariff truce evolves into something durable—or just another ceasefire before the next round of economic gunfire. For now, the playbook is simple: trim the fat, tighten stops, and keep one eye on 10 year bond and the other on Trump’s next headline. The real war isn’t over T-shirts—it’s over teraflops.

The view: Real rates, real pain

Forget the nominal distractions—real yields are where the rubber meets the recession risk. And right now, the rubber is burning. The real yield on the 10-year Treasury is closing in on 2.20%, the highest in a decade, and the real fed funds rate has quietly surged past 2.00%—up more than 50 basis points since January. That’s not just a data point—it’s a tightening tourniquet that’s starting to choke global risk sentiment, drip by calculated drip.

While Fed Chair Powell may still be whispering sweet nothings about rates being in a “good place,” the market has other ideas. We’re now dancing well above most estimates of R-star—the Fed’s not-so-imaginary neutral rate—which hovers somewhere between 0.8% and 1.3%. Real policy rates are blowing past those levels like a runaway train, and unless the Fed resumes cutting, policy is getting tighter by the day—even if the target range hasn’t budged.

This isn’t about a mechanical rise in rates. It’s about real-world borrowing costs starting to bite—on capex budgets, on consumer credit, on investor risk appetite. And that’s exactly what we’re seeing leak into cross-asset markets: a quiet unease creeping into credit spreads. The pure risk-on impulse that defined Q1 is fading, replaced by a slow drip of policy friction.

Even without another Liberation Day-style tariff freakout, Goldman’s Financial Conditions Index shows steady tightening since last September. And if you strip out the brief post-tariff panic, conditions haven’t really eased—they’ve just stopped worsening fast enough to trigger alarms.

The catch? This isn’t just a Fed story. If real yields are rising because investors are demanding a higher premium to hold dollars and U.S. paper amid record deficits and fiscal theater, then that’s a confidence crack—not a growth signal. And the further real rates drift from the Fed’s theoretical sweet spot, the louder the alarm gets—not in theory, but in capital flows, equity vol, and loan book stress.

Sure, Japan’s real policy rate is still buried in deep negative territory, which has helped support global carry trades and kept volatility contained. But the U.S. is now running the tightest real monetary policy in the G4 by a country mile. That’s a gravitational pull too strong to ignore—and global risk markets are starting to lean into it.

Real rates aren’t just a side dish—they're the main course. And right now, the menu is shifting from risk on to slow burns. The longer we stay above R-star, the more likely the spillover becomes systemic. Don’t be fooled by today’s calm—beneath the surface, the yield tide is turning.