After slumping close to 19 per cent in the wake of the “Liberation Day” announcements in early April, the US sharemarket has come roaring back to life over the past few weeks.
A 90-day pause on tariffs for most countries a week after the initial proposals spurred the initial recovery, but the biggest news came on Monday this week.
After two days of discussions over the weekend, the US and China agreed to a 90-day tariff truce.
The combined US tariff rate on Chinese imports will fall to 30 per cent, made up of the baseline ten per cent facing all countries as well as the 20 per cent fentanyl-related tariff on Chinese goods.
That’s still high, but 30 per cent is a lot lower than 145 per cent, which is where the proposed US tariffs on China had spiralled to before the weekend’s negotiations.
China will do the same, reducing its levy on US imports to 10 per cent from an equally crazy 125 per cent this time last week.
China also agreed to suspend the non-tariff retaliatory measures it had implemented over the past six weeks, including export controls on rare earths.
This was a bigger announcement than markets were expecting, and it substantially diminishes the risk of a full-blown trade war.
As with the rest of the world, the tariffs have been paused rather than cancelled, but we’ve bought ourselves another 90 days.
One would hope the dialogue between the US and China will continue, and that we’ll see a further ratcheting down of the tensions.
It was notable that China brought a deputy Minister of Public Safety to the negotiating table to discuss the fentanyl-related issues.
That offers hope for further reductions, as a removal of the fentanyl-related tariffs would bring Chinese tariffs back to a manageable ten per cent.
On Monday the S&P 500 index in the US rose sharply in response to this news, and it has now rebounded 17.2 per cent from the lows of five weeks ago.
That sees US shares just five per cent down from the all-time high from February and close to flat on a year-to-date basis.
The US dollar has also recouped some of its losses, while gold prices have softened as the risk aversion has reduced.
From where we were at just a few short weeks ago, this is some turnaround.
We now have two separate deadlines to keep an eye on as the 90-day reprieves expire, one in July for most countries and then another in August for China.
Many people thought China would end up getting the roughest end of the stick from the Trump administration, but maybe that’s not the case.
With that in mind, it’ll be fascinating to see what this means for Europe, where we haven’t heard much on the deal-making front.
However, the US policy position does seem to have galvanised leaders across the Atlantic, even if by accident.
We’ve seen a big shift in European defence policy, spending and procurement, all of which will be positive for the bloc in the years ahead.
Consider that alongside China’s increased desire to rebalance towards consumption (in the wake of the tariffs), and you’d almost suggest that Trumps actions this year have been a positive driver of progress. Go figure.
These developments should be good for New Zealand too, as well as Australia.
Neither country was in the immediate firing line when it comes to US tariffs, but the indirect effects of a Chinese slowdown were a much bigger risk to the outlook.
The local NZX 50 index is up seven per cent so far in May, which sees it on track for its biggest monthly gain in more than five years.
Markets aren’t completely out of the woods, although this is a significant de-escalation.
It sharply reduces the risk of a global recession, while confirming that this entire process is still a negotiation.
Investors who remained calm and didn’t overreact earlier in the piece will be glad they did.
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Mark Lister
Investment Director
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.