The futures are in the positive this morning on news that the trade talks between the US and China could lead to progress, as the Chinese Premier wi
The futures are in the positive this morning on news that the trade talks between the US and China could lead to progress, as the Chinese Premier will reportedly meet US Treasury Secretary Bessent later this week to discuss tariffs. It’s possible that we hear about significant cuts to the recent tariff rates the two giants imposed on each other. But the tariffs are so high – 145% for Chinese goods imported into the US and 125% for US goods imported into China – that even a significant improvement might not satisfy China, which continues to prepare for a potentially prolonged war.
The People’s Bank of China (PBoC) freshly lowered its policy rate and reserve ratio today in an effort to strengthen its monetary support for the Chinese economy, which is seeing a slowdown in activity. As such, the CSI 300 is better bid this morning – the index is back to April 2nd levels, when Trump blew the world’s mind with his unreasonable tariff levels – while the Hang Seng jumped above its 50-DMA, though gains remained fragile and were mostly given back by the time of writing.
The US dollar is slightly positive this morning, as the selloff against Asian currencies cools. Good news from the Chinese front could bring back hopes and risk appetite. The latter would result in a recovery in the US dollar and a further rebound in equities.
But uncertainties persist
In America, Trump’s meeting with Canadian PM Carney was less catastrophic than it could have been, but no deal is on the horizon yet. On the European front, the EU said it would hit EUR 100bn worth of US goods with additional tariffs if there is no deal by the end of the famous 90-day negotiation period – on top of the EUR 21bn of goods already targeted.
Meanwhile – and unsurprisingly – the US trade deficit hit a record high in April as companies rushed to import goods into the US before the tariffs took effect. Canada’s exports to the US saw the biggest decline since 2020: exports tumbled 6.6%, imports fell nearly 3% on reluctance from Canadians to buy US goods.
The good news for Canadians is that exports to other countries jumped nearly 25% – yes, 25% – almost fully offsetting the loss from US trade. The Loonie strengthened by almost 10 figures since the February peak against the US dollar despite a persistent fall in oil prices – similar to other majors that also saw their valuations surge amid rising trade tensions. This was totally unexpected at the start of the year.
The trade war was supposed to boost demand for the safe-haven USD, but that didn’t happen. And as days go by, it becomes clearer that countries are not willing to play along, and Trump is losing his influence – a situation that could lead him to back off and de-escalate.
The latter would come at a good time, as the tariff crisis is taking a toll on US earnings forecasts: companies have kept insisting that the tariffs would be bad for business – duh – and some even scrapped their earnings guidance because it’s too hard to see what will happen tomorrow.
Inside equities, we’re also starting to see a divergence among the so-called Mag 7 companies: firms with complex supply chains – and therefore exposed to tariffs – like Tesla, Apple, Amazon, and Nvidia are under greater pressure than companies whose products haven’t yet been targeted, like Google, Meta, and Microsoft. Though note that these tech giants could also find themselves in the crossfire if tensions between the US and Europe rise again. Europeans are coming after US Big Tech… with their regulators.
On top of that, Tesla sales in Europe continue to decline – a reaction to Elon Musk’s political support for the extreme right. Sales in Sweden were down more than 80% in April. And according to Electrek, BYD outsold Tesla in both Germany and the UK in April. The company’s sales in Germany rose by – I hope you’re sitting – 756% in April.
Any good news from the Chinese front may not help Tesla much, but will probably open the door to other negotiations – and hopefully good news.
Decision time
What do you do if you’re a Federal Reserve (Fed) President and must decide what to do with monetary policy to – at least – not make matters worse? Well, I guess you just wait. You wait to see if the negotiations lead to trade agreements, you wait to see the impact of tariff uncertainty on your growth and inflation metrics, you wait to see demand for the US dollar and US Treasuries in this newly shaping world order. And more importantly, you avoid making decisions in a hurry.
So, the Fed, which will announce its latest policy decision today, is expected to bring no changes to monetary policy and say it will monitor market conditions and the data carefully before announcing the next rate cut. Make no mistake: what Powell says in his press conference today is more important than the decision itself.
If Powell still thinks the tariff-led inflation boost could be more than just temporary – and should be addressed accordingly – the USD and US markets won’t like the news. If, however, Powell softens his stance to join other Fed members in showing willingness to support the economy, we could see sentiment in USD and equities improve.
But the Fed is not the only major factor driving appetite these days. Whatever the Fed says, it’s trade news that will likely set the tone.
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