Risk appetite surged at the beginning of this week following an unexpected breakthrough in US-China trade talks.
Investors were caught off guard by the announcement at 08:00 BST on Monday, which put some detail on reports that the two sides had enjoyed productive discussions over the weekend.
The surprise came as most observers were under the impression that the meet-up in Geneva between US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng was simply a preliminary discussion to agree on the terms of engagement for more protracted and in-depth discussions.
In fact, the talks brought something far more substantive. It was stated that both China and the US would slash their respective import tariffs by 115% for 90 days as of 14th May. This took levies down to 10% for Chinese imports from the US, and to 30% for US imports from China.
The US tariff included an additional 20% with respect to fentanyl. Most importantly, the deal provided a reasonable basis for further talks to take place over the next three months.
President Trump later insisted that, most importantly, the talks have opened up China to US businesses.
US stock indices soared on the news, as did the US dollar and crude oil.
Precious metals slumped. All four of the major US stock indices have now recouped the losses they suffered in the aftermath of President Trump’s reciprocal tariff announcement on 2nd April.
In addition, Dow excepted, the S&P 500, NASDAQ and Russell 2000 have hit levels last seen in late February and early March. That means that the S&P and NASDAQ are closing in on their all-time highs from mid-February.
Does this market reaction seem reasonable? Well, on one level, that question is beside the point.
The market is the market, and it will do what it will do. But it’s worth asking how much the situation has improved from pre-tariff days.
World trade has been severely disrupted over the past five weeks or so, and it sounds reasonable to conclude that it will take more than a couple of months for trade to get back to pre-tariff levels. And let’s not forget: tariffs that weren’t in place in early April are in place now.
Not only that, the most egregious of tariffs on US imports were postponed this time last month for 90 days.
We’re already one-third through that timeline, and while the US found it easy to come to an agreement with the UK, with whom the US has a trade surplus anyway, it may find other deals harder to reach.
But that aside, the main concern is the Trump administration’s trade war with China.
Aside from the initial ‘loss of face/no backing down’ approach that greeted Trump’s early tariff salvo, there’s every reason to expect both sides to want to reach an accommodation. And after the weekend agreement, there are now three months to get the whole thing done.
On top of this, US investors are salivating at the prospect of finally getting a foot in the door and opening up operations in China. But really? China has been a member of the World Trade Organisation since 2001, and has played them like a tiger with a brace of kippers.
Can Trump really persuade them to trade fairly now? The clock’s ticking.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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