Markets erase memory of Liberation Day

Markets erase memory of Liberation Day

• US stocks are set to erase all losses since April 2^nd.
• US mid-caps and Big Tech are leading the rally higher.
• But can the rally last?
• As recession risks are priced out, US bond yields are surging, and Fed rate cuts are being priced out.
• The dollar is stronger across the board, and the euro is getting slammed, as an EU trade deal is conspicuous by its absence.
• Walmart results later this week are a test to see what the actual impact of the latest US/ China trade deal are on the real economy.

US/ China trade deal details continue to emerge

At the start of this week, Liberation Day is a distant memory for financial markets. Stocks are surging, safe havens are rapidly declining, and expectations for Federal Reserve rate cuts have been dramatically scaled back. The driver is the suspension of tariffs between China and the US. The US has reduced tariffs on Chinese goods from 145% to 30%, and China has reduced tariffs on US goods to 10%. The US Treasury secretary has said that tariffs won’t decline from this level, but he said that the deal brokered this weekend will bring an end to the trade embargo between the world’s two largest economies and is the end of de-escalation.

The US Treasury Secretary has been giving more detail about the terms of the deal. He wants to see China boost consumption and buy more US products. This is a difficult task, China has been attempting to rebalance its economy for years, with little effect. It is hard to see if this deal will cause a shift in China’s economic mix, away from exports and towards consumption. The risk is that if China does not boost consumption, especially of US goods, in the coming weeks and months, then tariffs could move higher on the US side. Thus, the embargo may be over, but a 30% tariff rate is still high and sector negotiations remain ongoing for the next 90 days.

Is a 30% China tariff rate really good news?

The market is in celebratory mood. Tariffs at 30% on Chinese goods are better than tariffs at 145%, but 30% is still a hefty sum, which could hit the consumer and the inflation rate down the line. However, optimism is the order of the day, especially for stock markets.

The Dax had already recouped its losses on Friday and reached a fresh record hgih, now the Eurostoxx and the FTSE 100 are playing catch up. European stocks are being led higher by consumer discretionary and tech stocks, the Eurostoxx 50 index is now back at levels last seen in late March, and the index is less than 3% away from 2025 highs reached in early March at 5540.

Healthcare is the new risky sector

Likewise, the FTSE 100 has also recouped the losses that accumulated since President Trump’s tariff announcement on April 2^nd. The FTSE 100 is benefitting from a return to cyclical stocks and the big boost to the oil price, Brent crude oil is higher by more than 3.4% and it is back above $65 per barrel. The boost to cyclical stocks is helping the counter the impact of a sharp decline in UK  pharma stock prices, after President Trump said that he would announce a path towards lower prescription drug prices in the US of between 30% and 80% Astra Zeneca is down 3.5%, GSK is lower by 2.3%, and Hikma Pharmaceuticals is also down by more than 2% on Monday. We are still waiting for details of this plan, but it could mean that pharma imports to the US will be hit with price caps for the consumer, rather than tariffs, which could be bad news for pharma companies’ revenues in the future. The fact that an American President is talking about lowering the price of prescription drugs, suggests that the US may take a tough stance on pricing with big pharma companies, akin to what the NHS does in the UK. The US has massive pricing power due to its size, and it is a policy that, if Mr. Trump can pull off, could boost his falling popularity levels. Healthcare is now impacted by US trade policy uncertainty; it has gone from a defensive sector to the riskiest sector in the market in the current environment, and the outlook for pharma stocks is all in the hands of Donald Trump right now.

Why stocks may not make fresh highs on the back of tariff news

US stocks are surging in the pre-market. The S&P 500 is higher by more than 3% in the pre-market, and the Nasdaq 100 futures are more than 4% higher on Monday morning. The question now is, does this rally have legs? US stocks are set to recoup all of April 2^nd losses later today, but can they take the next step and move to fresh record highs? This could be a step too far in our view, even if stocks continue to rally for the next few days. Our reasons include:

• Average US tariff rates are still higher than they were at the start of this year.
• We still do not know the long-term damage to the US reputation for political stability from the tariff saga.
• Walmart results on Thursday are worth watching to see if the company can provide forward guidance after the reduction in US/ China tariffs, and to see how the current tariff levels have impacted its revenues. This could be a key litmus test for the market, and it will no doubt drive market sentiment later this week.
• While recession risks for the US and the global economy are likely to be revised down, the US still has not struck a trade agreement with the EU, which has the potential to weigh on growth on both sides of the Atlantic.
• The shift out of safe havens into risky assets has seen a massive recalibration in Fed rate cut expectations. The market is now expecting 2 cuts this year, down from 4 cuts expected a week ago. Higher interest rates could impact demand for consumer discretionary and other cyclical stocks down the line.
• US Treasury yields are also on a wild ride today, the 10-year has risen by 7bps, and the 2-year yield is higher by 10bps, so borrowing costs has risen for companies.
• The shift out of US stocks and into European stock indices has helped to rebalance portfolios in a healthy way. The European trade is not just an anti-Trump trade,  Europe has its own things going on. For example, defense spending and German fiscal largesse could keep flows into European equities buoyant, as we wait for a resolution to the EU/ US trade negotiations.

Big tech leading the charge for stocks

Apple shares are up 6% as it will benefit from the decline in China tariffs, it is also planning price increases for iPhones later this year, which could boost its revenues. Nvidia shares are higher by more than 4%, Meta is up by nearly 6%, Amazon by more than 8% and Tesla is also higher by more than 7%. If tech continues to lead the rally in US stocks, then this rally could have legs, but we still do not see US stocks making fresh record highs on the back of the China/ US trade deal.

The euro takes the brunt of EU trade agreement angst

For now, the China and UK trade deals with the US leave the EU conspicuous by its absence in US trade announcements. As mentioned, European stocks are joining in the global rally, as they also benefit from strengthening global growth. The euro is feeling the consequences of the delay in a trade deal between the US and the EU, which seems like it will be a tough slog to achieve. The euro is one of the weakest currencies in the G10 FX space so far on Monday and is down 1.3% vs. the USD. Volatility in the forex space had boosted the euro for most of this year, but now that the dollar is making a comeback, some of those euro longs will get unwound. This is a sign that the market is pricing in a US resurgence, which is USD positive, although we continue to think that strong European stocks could limit euro downside in the medium term, and we would note that the dollar has not recouped all its losses since April 2^nd. Whether or not the dollar can sustain gains might depend on whether the dollar index can close above the 50-day sma at 101.90 later on Monday. A break above this level would suggest that momentum remains to the upside for the medium term.

Please join our Market Live this evening at 1800 BST to talk about today’s moves, the outcome of the US/ China trade negotiations and the future for markets