What an unexpected turn of things

What a blast we had yesterday, didn’t we? The week kicked off with the news that the US and China would announce ‘substantial’ progress in trade negotiations — and the progress was indeed close to substantial. Tariffs were pulled down from 145% to 30% for Chinese exports to the US, and from 125% to 10% for American exports to China.

Yes, the deal is valid for just the next 90 days — similar to the trade relief that the rest of the world currently enjoys from the US administration — but it’s still a big surprise given that we had come to the conclusion the two sides would never talk again. Ever.

So, markets raved with joy. The S&P 500 jumped more than 3%, breaking above both its 100- and 200-day moving averages and adding $1.7 trillion in market value. The Nasdaq 100 surged more than 4%, cleared the 20K offers, and broke its 100- and 200-DMAs. Apple, Tesla, and Nvidia — which had remained in the crossfire — all added between 5–6%, while Amazon rallied more than 8%. The Nasdaq Golden Dragon China Index gained 5.40%. The Dow Jones climbed 2.80%, and US crude rose to $63.60 per barrel.

Small- and mid-cap stocks, however, remained more muted despite the news and even posted slight losses, as the developments dented dovish Federal Reserve (Fed) expectations. The US 2-year yield jumped to 4% on thinking that the tariff pause could support the US economy and reduce the need for Fed support. The probability of a June rate cut fell to below 12%, from nearly 14% before the announcement details came out. The US dollar rebounded sharply, gold tanked 2.73%, and the USD/CHF jumped 1.73% — excellent news for the Swiss National Bank (SNB).

In Europe, the Stoxx 600 rose 1.21%, on the realisation that the US administration isn’t as sanguine as it sounds when fundamentals are shaken. The SMI and FTSE 100 lagged behind other major indices, as heavyweight pharmaceutical stocks came under pressure from Donald Trump’s push to reduce prescription drug prices to the lowest global levels. But even that worry faded, as the fine print suggested that companies will be given a chance to lower prices voluntarily before any action is taken.

So yes — it could hardly have been better.

In Asia, the CSI 300 rose more than 1% and the Nikkei surged 3.40%, though gains are being given back today. European and US futures are also down — a bit of a hangover after yesterday’s party, a moment to question how good the news really is, and how long the truce might last.

Because while recent days have brought major progress to the table, this isn’t the end. Talks could be interrupted at any point, as strategic decoupling between the US and China will continue for national security reasons — keeping pressure on key sectors, including semiconductors.

Also worth noting: the so-called de minimis exemption that allows cheap Chinese products into the US remains at 120% — meaning Shein and PDD won’t massively benefit from the tariff relief.

And of course, uncertainty over what happens after the 90-day pause will keep many companies in wait-and-see mode, delaying investment decisions until a more durable truce emerges.

In the best-case scenario, the damage will be contained. In the worst-case, we start all over again.

One certainty: shipments to the US will continue at full speed in fear of another breakdown and frontloading will likely continue to pressure the US Q2 GDP reading.

Today, investors are walking into the US CPI update with a lighter heart. There’s a chance that the 90-day tariff pause — along with the latest dip in consumer sentiment — could help temper inflationary pressures in the US and give the Fed more room to act, if needed.

Bloomberg’s analyst survey suggests that both headline and core inflation likely jumped in April (m-o-m) due to the tariff situation. If the data comes in line or ideally softer-than-expected, it would reinforce the bullish mood — taming selling pressure on US Treasuries, boosting equities and the dollar. A stronger-than-expected read wouldn’t echo well, but might still be partly overlooked, given the dramatic shift in trade expectations.

Speaking of inflation, eurozone countries will also be updating their April inflation figures this week. Early April data had surprised to the upside, denting dovish European Central Bank (ECB) expectations. While the ECB is still expected to continue cutting rates, the expected pace is now slower. The EURUSD is giving back early-year gains as tariff de-escalation improves US growth prospects. But euro bulls see beyond the ECB/data narrative: many believe the ongoing trade war will help cement the euro’s position as a global reserve currency. Currently, the euro makes up about 20% of central bank reserves — versus 60% for the USD — and there’s room for more.

The EURUSD fell to its 50-DMA yesterday on broad-based dollar strength. For those betting on the euro’s long-term fortunes, current levels could present interesting dip-buying opportunities.