Last week’s signing of a trade deal between the UK and US is already old news. Within days, the much more significant agreement between China and the US has grabbed the headlines. And markets have responded with enthusiasm to a temporary cessation of tariff hostilities.
Trade truce
Using identical statements, representatives of China and the US this week announced a massive, if temporary, cut in the eye-watering tariffs that the two have put in place on imports from the other. The US reduced its 145% tariff on Chinese imports to just 30% while Beijing slashed its own levy on US imports from 125% to 10%.
It’s only a 90-day deal, to allow more substantive talks on a permanent trade solution. But it is progress. And the market welcomed the announcement. Shares in Hong Kong rose more than 3% on the news, European shares were more than 1% higher and the futures markets pointed to a positive response on Wall Street too.
Other market reactions suggested the news was a positive surprise. The dollar rose, gold fell back and safe currencies in Switzerland and Japan were lower. The oil price responded positively to a move that at the margin improves the outlook for global growth, with Brent crude 3% higher. The yield on US Treasuries nudged higher, with the 10-year bond now paying 4.44%.
Equity rollercoaster
The news on tariffs is just the latest development in a roller-coaster ride for stock market investors so far in 2025. And while markets have been moving up and down in response to the latest news flow, at the same time a seemingly more long-lasting rotation out of dollar-denominated US assets and into out of favour assets like European and Asian shares, as well as gold, has gathered pace.
German shares climbed to a new record high last week, becoming the first European benchmark to recoup the losses incurred since Donald Trump’s ‘liberation day’ tariff announcements in early April. The DAX index is up 18% year to date, significantly outperforming the S&P 500 which remains well below its February high and in negative territory so far in 2025.
While it looks like panic over in the short term, the longer-term picture is unclear. Investors standing back from the daily ups and downs are trying to position the current market in a longer-term perspective. One of the parallels they keep landing on is the late 1960s when investors had also enjoyed a long bull market but were facing growing threats from among other things, a nascent inflation problem.
New look diversification
Back then, investors were rewarded for balancing their equity portfolios with a wide range of diversifying hard assets like gold, other commodities, property and infrastructure. Today, as the traditional diversifier of bonds looks less effective - moving as they are more in line with shares - investors are once again looking further afield. Uncorrelated returns, and inflation protection, are giving financial markets a ‘back to the future’ feel, with gold, in particular, hitting new all-time highs around US$3,500 an ounce.
