US-China trade breakthrough helps boost US equities

Markets are in full risk-on mode as traders jump into US futures in the wake of a weekend deal that saw both the US and China slash tariffs in a 90-day reprieve for markets. The deal has seen the US drop Chinese import taxes to 30% (from 145%), while China have lowered their 125% tariff to just 10%. For traders this deal does help alleviate much of the fear around a potential recession in the second quarter, with near-term data weakness caveated by the fact that terms of trade have since improved and thus any major deterioration could be short-term in nature. While the Trump administration has maintained its sector-specific tariffs for now, there will also be an optimism that inflation pressures are going to significantly less impactful, thus allowing the Fed to look beyond a short-term bump in price pressures.

In Europe we have seen the DAX surge into fresh record high territory, as investors look ahead to US-EU trade talks with a cautious optimism. With the German economy already expected to enjoy a welcome boost from higher domestic and European defence/infrastructure spending, a trade deal and improved global economic outlook would help further encourage investors after years of struggles. Meanwhile, we have also seen progress on the Ukraine-front this weekend, with Zelensky apparently willing to meet Russian reps in Turkey as they seek to draw a line under the conflict.

The trade deal between the US and China has helped calm nerves around the potential end of the widely perceived US exceptionalism, with the dollar index climbing to the highest level in over a month. The prospect of investors moving away from US assets becomes less of an issue with each trade deal that is struck, and the Chinese deal is undoubtedly beneficial for US assets such as the US dollar and treasuries. The price of gold has taken a hit as haven assets fall out of favour, with the precious metal dropping by 3%. In part the strength of the dollar and weakening gold price comes as traders expect a less active approach from the Fed, with Powell likely to ease at a steady rate in the absence of an economic deterioration.