The trade war continues, with another highly volatile week in the markets. The US and China are now at the center stage of current discussions, after Trump rolled back most of his planned levies on the majority of countries for at least 90 days, citing investor fears as one driver of the decision. Despite that, he ended up increasing China's tariffs to 154%, and the Asian country is now charging 125% duties on imported American goods.
Following Trump's announcement of changed plans during the week, a strong rally in the markets followed the news, pushing the S&P 500 and Nasdaq up more than 9-10% in one session, marking their best days since 2008 and 2001, respectively.
Despite the positive week in the equity markets, with US indexes closing up 5% to 7%, we saw turbulence in US Treasury bonds as markets started to price in a difficult path for US-China relations. Bond yields widened 30 to 50 basis points as fears increased that China and other foreign investors holding US Treasuries might decrease their positions in the future. The US Dollar index finished 3% weaker.
Several Wall Street strategists cut their 2025 outlooks for the S&P 500, lowering their expectations for corporate earnings, while multiple economists increased the likelihood of a recession, with odds now ranging from 30% to 50%. Markets are pricing in three 25 basis point rate cuts in 2025, with Fed speakers recently highlighting the current challenges, expecting higher unemployment, higher prices, and slower economic growth. Meanwhile, a US sentiment survey last week showed consumers expect the highest long-term inflation since 1991.
The market starts this week on a positive note, after a temporary pause on electronic tariffs was announced by the US government over the weekend. Volatility should remain high as investors continue to closely monitor US-China relations. For a rebound in risk-taking to have further momentum, investors certainly need to see continued signs of flexibility on tariffs and an overall improvement in trade relations.
