Weekly Comment: Stocks rally on US-China tariff deal

Market overview – Richard Carter, Head of Fixed Interest Research

A significant de-escalation in US-China trade tensions has caused a sharp move higher in equities at the start of the new week. US stock futures rose to their highest level in over two months in response, Treasury yields increased to near a 1-month high and the US dollar rose to levels not seen since early April.

The US will reduce its reciprocal tariff on Chinese goods to 10%, keeping the baseline 10% broad tariff rate and the separate 20% additional rate related to the fentanyl issue in place. This means the overall tariff will be 30%, down from 145% before the agreement. China will likewise reduce its retaliatory levy on US good to 10%, down from 125%, and suspend or cancel nontariff measures adopted in retaliation to the US. These reductions will last for 90 days, as both parties continue negotiations.

The news is the second substantial de-escalation from the US in its approach to tariffs after the 90-day pause on all countries bar China was announced last month. Comments from US President Donald Trump and his advisers had suggested that a reduction in tariffs was coming, but the scale of the move is larger than most market participants had expected and therefore caused a sizable move higher for stocks. Although the reduction is only for 90 days there is a feeling among investors that the worst-case scenario has been avoided and the chances of longstanding tariffs above 100% — effectively tantamount to a near trade embargo — now seem increasingly unlikely.

Last week the UK agreed the first deal with the US since Donald Trump announced the reciprocal tariff measures on 2 April, with lower tariffs on cars and steel exports positives. However, the 10% levy that applies to most goods remains in place. In effect, the deal provides a more favourable trading relationship than before, although the terms are not as favourable for the UK as they were before reciprocal tariffs were announced.  Furthermore, many of the details of the deal are still to be ironed out, showing how complex and protracted the process of reordering global trade will be.

Developments in trade relationships are changing quickly and there remains a high degree of uncertainty how the landscape will look in six months’ time. It appears likely that Trump has followed a escalate-to-de-escalate strategy and that the tariffs announced in early April will serve as a high-water mark. That said, a complete rollback of tariffs seems improbable, leaving global trade in a less favourable position than at the start of the year. This will weigh on economic growth and could also lead to inflationary pressures through higher prices. There is also a potential lasting impact on business confidence and investment, as the prospect of stringent tariffs demonstrated a level of unpredictability among policymakers that was perhaps underestimated before the announcement.

Weekly economic announcements:

Last week, the MSCI All Country World index (MSCI ACWI) declined 0.2% as market participants took stock following a decent recovery.  

United States:

US benchmarks dipped 0.4% on the week ((-3.3% YTD), with growth shares underperforming value stocks and small caps outperforming large caps. After a 9-day winning streak coming into last week it is not too surprising that there was some consolidation. The Federal Reserve (Fed) meeting saw rate setters keep the fed funds rate in the 4.25%-4.50% target range, as was widely expected.

Chair Jay Powell said the Fed remains in “wait and see” mode, as they monitor incoming data while acknowledging that there is a challenging scenario whereby the Fed’s dual-mandate goals of price stability and maximum employment are in a position requiring differing monetary policy.   

United Kingdom:

The Bank of England lowered its base rate once more, voting 5-4 to cut by 25 basis points (0.25%) to 4.25%. The decision was finely balanced, with two of the dissenters voting for a 50 basis point reduction and two voting for unchanged. This disharmony among rate setters highlights the increased level of uncertainty regarding future interest rates, as central bankers attempt to grapple with the impact of tariff developments alongside domestic considerations.

UK stocks ended the week down 0.4% (6.3% YTD) but mid-caps rose 1.3% to move back into positive territory for 2025 (0.7% YTD). Government bonds were little changed on the week, with the 10-year gilt yield rising 6 basis points to end the week at 4.57%. Sterling ended the week unchanged versus the US dollar at US$1.33.

Europe (ex UK):

Continental European stocks rose last week, with the MSCI Europe ex UK finishing up 0.5% (8.4% YTD) for a fourth weekly gain in a row. German benchmarks added 1.8% (18.0% YTD), French bourses increased 0.2% (6.4% YTD) and Italian equities climbed 2.7% (16.7% YTD). The euro was little changed against the US dollar, closing at US$1.13.  

Approver: Quilter Cheviot, 14 May 2025  

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