The Trade Truce and Its Impact on the Markets: Wall Street investors who believe
that the trade truce between the United States and China
marks the end of the tariff war, which drove the S&P 500 index to rise by over 3%,
while defensive assets such as bonds, gold, and safe-haven currencies declined.
The dollar also recorded its most significant gains since the November presidential elections.

Contents

Shift in Risk Appetite
Temporary Truce
Market Reaction

Broad Relief in Asia

Return to Risk

Trump

Inflation

Fed Warnings

A Shift in Risk Appetite Restores Market Momentum

This renewed risk appetite and declining recession expectations pushed
the index past the “Liberation Day” level declared by President Donald Trump on April 2.
Major tech stocks also rallied, pushing the Nasdaq 100 back into a bull market after falling 20% from its peak.

Amid signs of inflation expectations being recalibrated, Treasury yields rose,
as investors reduced expectations for Federal Reserve rate cuts to only two in 2025.

Investors who had adopted defensive strategies during April’s turmoil faced many opportunities and risks,
particularly with positions such as shorting the dollar, betting on stock volatility,
and anticipating multiple rate cuts, which caused them to incur significant losses.

Temporary Truce and Major Tariff Cuts

Following high-stakes talks in Switzerland,
negotiators from the world’s two largest economies announced a significant tariff reduction.
For 90 days, the U.S. cut tariffs on Chinese products to 30% from 145%,
while Beijing reduced its tariffs on most U.S. goods to 10%.

Jeff Buchbinder of LPL Financial described the move as a “major positive surprise,”
noting that eliminating worst-case scenarios is reassuring to markets.

Markets React Positively Worldwide

The S&P 500 surpassed its 200-day moving average, the Nasdaq 100 surged 4%,
and the Dow Jones Industrial Average added over 1,000 points.

The “Magnificent Seven”—Apple, Amazon, Nvidia, Alphabet, Meta, Microsoft, and Tesla
jumped by 5.7% amid renewed optimism about tech.

Meanwhile, Treasury contracts rallied and the 2-year yield climbed 12 basis points to exceed 4%,
before retreating by 3 basis points, reflecting declining bets on rapid rate cuts.

Although temporary, Carol Schleif of BMO Private Wealth said
this surprise tariff reduction was “exactly what equity markets were hoping for.”
Ulrike Hoffmann-Burchardi of UBS Global Wealth Management said the current optimism
was unexpected and indicates a clear shift in U.S. tone.

Broad Relief Across Asia

Asian stocks followed U.S. gains, with Japan’s TOPIX index leading,
extending its rally for a 13th straight day. Equities in Australia and Taiwan also rose.
However, after previous gains, Hong Kong’s Hang Seng Index declined by 1%.

In China, optimism was palpable. The CSI 300 Index rose for a second consecutive day.
Patrick Pan of Daiwa Capital Markets wrote:
“We expect the wave of trade optimism to support Chinese equities in the near term,
and for the Hang Seng Index to revisit its March highs.”
He pointed to tactical electronics, textiles, shipping, and electrical equipment opportunities.

Return to Risk and Abandonment of Defensive Postures

Investors returned to Asian markets, shedding defensive positions popular in April,
amid hopes of halting the U.S.-China economic decoupling.

HSBC strategists led by Max Kettner wrote:
“Markets are likely to anticipate more agreements soon.
Despite potential negotiation turbulence,
The shift in U.S. tone turns upcoming market dips into buying opportunities.”

Trump’s Comments Influence Investor Sentiment

President Trump’s remarks had an immediate market impact
His April 9 statement that “it’s a great time to buy” was followed by a tariff freeze, then reaffirmed on May 8.

Morgan Stanley warned, however, that current momentum does not guarantee safety,
As only two of the four conditions for a sustained rally have been met:

Optimism about a trade deal
Stabilized corporate earnings

Still absent are:

A more dovish Federal Reserve
Sub-4% bond yields without signs of recession

Inflation in Focus and Tariff Impact Ongoing

Chris Larkin of E*TRADE, part of Morgan Stanley,
emphasized that sustaining momentum requires support from inflation data, retail sales, and corporate earnings.

He warned that stagflation narratives could undercut bullish sentiment,
despite signs of a resilient economy.

Swap contracts tied to monetary policy are now priced at a 56 basis point rate cut by December,
down from 75 basis points last week. The first quarter-point cut is expected in September.

Federal Reserve Cautions Against Overconfidence

A Federal Reserve Governor, Adriana Kugler, said that despite the recent tariff reductions,
the Trump administration’s tariff policies may fuel inflation and hinder economic growth.

In a speech in Dublin, she noted: “Trade policies remain in flux and are likely to continue evolving,
even as of this morning.
Nevertheless, they are expected to have significant economic effects, even if tariffs stay near current levels.”

Austan Goolsbee, President of the Chicago Fed, added in a New York Times interview
that the trade deal’s temporary nature and high tariff levels burden growth,
posing long-term risks to prices and the broader economy.

The Trade Truce and Its Impact on the Markets

The Trade Truce and Its Impact on the Markets

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