With US-China tariffs now at much more palatable levels as far as investors are concerned (with the US charging 30% on China, and China charging 10% on the US during the 90-day pause period, with some exceptions, compared to the 145% and 125% that had been in place prior, respectively), the shackles have largely been removed from risk assets. Albeit that there are still some underlying nerves about just how much progress can be made between the world’s two biggest economies during this tariff ‘ceasefire’ period, with sectors such as agriculture, technology and pharmaceuticals shaping as points of contention.
But the mere fact that China and the US are no longer placing an effective trading embargo on one another has released the pressure-valve for financial markets. Despite the market panic following the April 2nd US tariff announcements, the S&P500 index is back in positive territory for the year (albeit barely). But, just how these talks progress in the coming months will have a big say in whether the cheery market mood from this week can be maintained into the second half of the year.
In FX, the USD has benefitted from productive US-China talks with the Dollar Index (DXY) climbing to near the 102 level on Monday, however the softer headline CPI figure (2.3% vs 2.4% prior, month-on-month) has caused the greenback to lose some momentum. As of Asian trading hours Wednesday, the DXY was trading at 100.90, ahead of support at 100.72 and 100.40, with resistance awaiting at 101.60 and 102.25. Despite the tamer inflation data, the softer stance by Trump on tariffs means there is less chance that we will be seeing an FOMC rate cut in the next few months, which means that treasury yields may be a pillar of support for the USD in the near-term. However, if the market starts to doubt the progress of US trade talks (with multiple nations such as Japan, South Korea, the EU and India lined up for trade discussions, not just China), the USD could quickly find itself under selling pressure again.
Gold has had a rough start to the week, with progress on the US-China trade front pinning the precious metal below the $3300 level as safe haven demand has eased. With the US and China lowering tariffs against each other for 90 days and a good chance that a longer-term deal may be achieved, recession fears have eased, which has reduced the search for safety assets such as gold. The pullback in the USD from its weekly highs on tamer inflation figures has enabled gold to make a modest recovery. But further upside for gold of any significance could be more difficult to muster whilst risk appetite remains buoyed by lower tariff levels. Resistance levels to watch include $3275 and $3300, while $3350 will offer a sterner test. Support arrives at $3199 and then at $3151. In the near-term gold will remain reactionary to tariff, India-Pakistan, and Russia-Ukraine headlines. If any of these situations flare up, then gold could quickly be back in favour. Buying-on-dips has been occurring on approaches to $3200 and this theme may continue with financial markets still not fully at ease about tariffs and geopolitical hotspots.
The oil price has made a nice recovery from its early-May woes, buoyed by international trade hopes. After the announcement of increased OPEC+ production at the start of the month, US Crude (WTI) slumped down to $55 but has since recovered 14% to trade at $63. While lower tariff levels from between the US and China at least for 90 days should support demand levels for crude, there are still questions over how much upside is left in oil with OPEC+ due to add another 411k barrels per day of oil to global supply starting on June 1st. Support levels are at $62.02 and $60.60, while on the topside resistance at $64.30 would need to be overcome for US crude to take a run at $65, where the next level of resistance awaits at $65.15.
For the rest of the week, US PPI will be watched to see if it mirrors the lower CPI print, while the Empire State Manufacturing Index and Philly Fed Manufacturing Index (both due for release on Thursday) will be watched for signs of US production activity. Investors will be looking for signs in upcoming data of how well the US economy has handled the uncertainty and to try and gauge what if any economic damage may have already been done from Trump’s tariff brinksmanship.
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