Investors react moderately to US-China trade talks

May 12, 2025 (MLN): Monday’s moderate market reaction to progress in US-China trade talks provided investors with a potential roadmap for how a significant breakthrough might unfold.

Despite being short on specifics, the Trump administration’s declaration of “substantial progress” prompted a shift toward assets linked to US and Chinese growth and away from traditional havens.

Strategists highlighted the sentiment boost from the announcement, though others cautioned that the lack of details maintained elevated uncertainty.

US stock futures outperformed European equity contracts and Asian shares, while the yen and Swiss franc weakened against the dollar along with Treasuries.

Currency proxies such as the Australian and New Zealand dollars gained alongside the yuan, while the euro retreated.

Michael Brown, strategist at Pepperstone Group, noted, The knee-jerk market reaction to weekend developments has been a positive one, with equity futures rallying across the board,

Treasuries selling-off a touch, and the dollar gaining ground against most peers. As the adage goes, though, the devil will be in the detail here.

Investors entered the weekend looking for signs of a de-escalation in the trade war, which has been a major driver of global markets.

Concerns remain that continued tit-for-tat tariffs could inflict a stagflationary blow to the US and global economies by driving inflation while pushing them toward recession.

Despite recent relief from some of Trump’s tariff pledges, many investors remain cautious about making significant bets without concrete reductions in levies between the world’s two largest economies.

Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA, said, Positive comments about the talks are a relief, but not enough to get back into risky assets.

Firm details that the tariffs rates are coming down to a 40% or lower level are necessary to support broader equity exposure, as Bloomberg reported.

Wall Street ended Friday on a cautious note with fluctuating stocks and bonds, following optimism that talks in Switzerland could help narrow differences between Washington and Beijing.

Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole, said, The de-escalation of trade, economic and geopolitical tensions could give market risk sentiment a boost.

The latest developments could become a boon for risk-correlated assets and currencies and a blow to safe-haven currencies like the yen, Swiss franc and even the euro.

Risk assets also found support from the ceasefire between India and Pakistan and the potential meeting of Russian and Ukrainian leaders this week.

Rounds of retaliatory tariffs have driven US duties on Chinese imports to 145%, with China imposing 125% tariffs on US goods.

Two-way annual trade between the countries stands at approximately $700 billion, while China holds an estimated $1.4 trillion in US portfolio investments.

Before the weekend, sources indicated the US aimed to reduce tariffs below 60% as an initial step, which they believed China might reciprocate. Trump suggested on social media that an 80% levy “seems right!”

The S&P 500 Index has returned to levels seen before Trump’s reciprocal tariff announcement in early April, which triggered the worst equity day since 2020.

A week later, Trump paused the steepest tariffs for most countries except China, sparking the best rally in the S&P 500 since the 2008 financial crisis.

A recent trade deal with the UK also lifted market confidence, although its details were seen as disappointing.

Trade tensions are beginning to impact US corporations, with firms like United Parcel Service Inc., Ford Motor Co., and Mattel Inc. pulling guidance due to growing tariff uncertainty.

On average, S&P 500 companies derived 6.1% of their revenue in 2024 from Chinese markets, based on Bloomberg Intelligence analysis.

The dollar extended gains in early Monday trading after its strongest weekly rise since late March but remains down 6% for the year according to the Bloomberg Dollar Spot Index its worst start in at least two decades.

Speculative traders, including hedge funds and asset managers, have accumulated $17bn in bearish dollar bets, based on Commodity Futures Trading Commission data.

Chinese equities rose on Monday after cautious investor behavior heading into the weekend.

The CSI 300 Index has nearly recovered all losses incurred since the US imposed tariffs over 100% on Chinese goods in the prior month.

Goldman Sachs strategists recently raised their 12-month index targets for MSCI China and CSI 300 to 78 and 4,400, forecasting returns of about 7% and 14% respectively from current levels.

Despite their traditional safe-haven role, Treasuries have declined since early April. The 30-year bond yield climbed to 4.85% on Monday from a recent low of 4.41% earlier that month.

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