LONDON – The dollar soared and government bonds sold off as markets reacted to a de-escalation in the trade war between China and the US, which agreed to temporarily lower some tariffs for 90 days.
A gauge of dollar strength rose as much as 0.9 per cent and the yen, a traditional haven, plunged as progress in talks stoked risk appetite across asset classes. The US 10-year yield climbed seven basis points to 4.45 per cent, its highest in nearly a month, while stocks got a boost on both sides of the Atlantic.
It is a major potential pivot point for markets, which have been roiled by US President Donald Trump’s attempts to rewire global trade. He targeted China with particularly punitive tariffs, sparking a trade war and fears of a recession.
“This kind of coordinated tariff relief, even if temporary, changes the investment landscape,” said Mr Nigel Green, chief executive officer of deVere Group. “It clears a path for businesses to recalibrate their outlook, and for markets to rally on something more than just hope.”
After weekend talks in Geneva, the US and China issued a joint statement indicating that they would temporarily lower tariffs on each other’s products for 90 days. It buys the world’s two largest economies three more months to resolve their differences.
In the US, Nasdaq 100 futures surged as much as 3.9 per cent while S&P 500 futures rose 3.1 per cent. Europe’s Stoxx 600 index climbed as much as 1.2 per cent but gains were tempered by a drop in pharmaceutical stocks as Mr Trump said he planned to order a cut in US prescription drug costs.
Still, the move toward de-escalation of trade tariffs spurred some big sector-level moves in Europe, with shipping stocks including Danish container giant A.P. Moller-Maersk A/S surging 13 per cent and Germany’s Hapag-Lloyd AG up around 10 per cent. Automakers Stellantis NV, Mercedes-Benz Group AG and BMW AG all rose over 5 per cent.
“These are cuts in tariffs which are much deeper than what was expected,” said Mr David Kruk, head of trading at La Financiere de L’Echiquier. “For those who were bearish since the tariffs announcement, this is a real pain trade. There is no more dip to buy so if you were not invested, it’s really hard to go in now.”
Havens slide
The Swiss franc and euro also plunged against the greenback following the announcement. The common currency, which had emerged as a haven amid the rout in US assets, fell 1.3 per cent to about US$1.11, putting it on track for its worst day this year.
“This is positive for G10 risk especially the Antipodean currencies and the US dollar,” said Mr Valentin Marinov, head of G10 FX strategy at Credit Agricole SA. “Easing US growth fears should further help restore market confidence in the USD-denominated assets.”
Traders rushed to pare wagers on the extent of interest rate cuts from central banks this year, as concerns over the economic outlook ebbed.
Swaps now favour a quarter-point reduction in September from the Federal Reserve, compared to as soon as July last week. The European Central Bank is expected to cut rates by less than 50 basis points for the remainder of the year, versus more than 60 basis points at Friday’s close.
Still, the relief for US assets may prove temporary. Even before the announcement on May 12, investors were warning that the US administration’s aggressive trade policies exposed the risk of significant overweights to the region, meaning outflows would likely endure even if trade tensions dissipated.
“We believe concerns around the US hard-data outlook persist, and potential asset allocation shifts away from US assets remain medium- to longer-term headwinds for the greenback,” said Mr Mohamad Al-Saraf, an analyst at Danske Bank. BLOOMBERG
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