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The escalation of the trade war between the US and China led to a significant downturn in the stock market, particularly affecting tech giants. Nvidia and Tesla stocks saw sharp declines, with Nvidia dropping nearly 7% and Tesla over 9% by midday. This was part of a broader sell-off in tech stocks, which dragged the Nasdaq Composite down by as much as 5%. The sell-off was triggered by China's retaliatory tariffs against the US, following President Trump's announcement of sweeping tariffs on trading partners. Apple and Meta also experienced significant losses, with Apple's market cap plummeting by over $310 billion in the previous session. Analyst Dan Ives from Wedbush warned that these tariffs could lead to an economic "Armageddon," potentially crushing the tech industry and increasing consumer electronics prices. Despite a slight recovery after Trump mentioned Vietnam's interest in reducing tariffs, major tech stocks like Nvidia, Apple, and Meta were still poised to end the week with substantial losses.
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The US and China have reached a preliminary agreement to reduce trade tensions, focusing on the flow of sensitive goods like rare earth minerals and magnets, following intense negotiations in London. This framework, built on prior talks in Geneva, aims to resolve disputes over critical mineral exports that recently threatened to derail their nascent trade truce. US officials, including Commerce Secretary Howard Lutnick, expressed optimism about settling rare earth issues and potentially lifting related export controls in a balanced manner. The talks, held over two days in a historic mansion near Buckingham Palace, also addressed broader concerns like fentanyl, a priority for the Trump administration. While both sides hope to rebuild trust during a 90-day tariff reprieve, challenges remain, as the deal awaits approval from Presidents Trump and Xi with no further meetings scheduled. China’s leverage in rare earths, vital for advanced manufacturing, underscores the strategic importance of this agreement, though experts caution that fundamental issues like chips versus rare earths persist. Market reactions were muted, reflecting cautious optimism about shifting from confrontation to coordination, though uncertainties linger over implementation.
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Traders are scaling back expectations for Federal Reserve interest rate cuts in 2023, now anticipating just one cut due to strong economic growth and persistent inflation. Swaps traders have reduced their forecast for easing to about 0.45 percentage points by year-end, the lowest since before President Trump's tariffs in April disrupted markets. Strong May jobs data and signs of easing trade tensions, highlighted by recent US-China talks in London, have further diminished bets on aggressive rate reductions. The Fed is expected to maintain current rates at its upcoming meeting, with upcoming US consumer-price data for May likely to reinforce a cautious approach. In the options market, particularly with SOFR-linked instruments, there’s a notable increase in hawkish hedging, with some traders betting on no policy changes this year. Meanwhile, JPMorgan’s Treasury client survey shows investors increasing net long positions to the highest since early May, indicating evolving market dynamics. Activity in Treasury and SOFR options also reflects a cautious outlook, with traders paying premiums to hedge against potential selloffs and focusing on downside protection over the next 18 months.
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May's Consumer Price Index (CPI) report, set for release on Wednesday, is anticipated to reflect a slight uptick in inflation, with headline inflation rising to 2.4% from 2.3% in April, and core CPI (excluding food and energy) increasing to 2.9% from 2.8%. This data comes under intense scrutiny as investors assess the impact of President Trump’s tariffs, implemented after his "Liberation Day" announcements. While many reciprocal tariffs have been paused, a 10% baseline duty remains for most countries, with higher rates on Chinese goods (around 30%) and specific tariffs on Mexico, Canada, steel, aluminum, and autos. Economists from Wells Fargo and Goldman Sachs predict a modest inflation rise due to higher goods prices, though significant jumps are not expected immediately. However, uncertainty persists regarding the timing and extent of tariff-induced price increases, with firms potentially delaying adjustments due to the unpredictable nature of tariff policies, as noted by BNP Paribas. Stronger inflation readings are projected for June and July, and ongoing tariff fluctuations complicate predictions, according to Atlanta Fed president Raphael Bostic. Despite these concerns, markets anticipate the Federal Reserve will hold interest rates steady at its next meeting.
