ON DECK FOR MONDAY, MAY 12
KEY POINTS:
- The 90-Day Fiancé Deal is driving risk-appetite higher
- The US and China sharply reduce bilateral tariffs…
- …to still punishing levels with all other measures intact
- The path toward a true deal will keep markets on tenterhooks into mid-August
- Markets continue to slash Fed cut pricing
- Global Week Ahead reminder here
The ‘90-day fiancé’ deal is driving a solid risk-on session to start the week. US S&P equity futures are up by 3¼% with a percentage point more for the Nasdaq, while European cash markets are gaining by between ½% and 1½%. Mainland China’s stocks rallied by between ¾% and 1¾%. US Treasury yields are bear flattening with the 2-year yield up 10bps as Fed cut pricing is being scaled back to about 50bps this year including nothing in June, and the first full cut priced for September. Compare that to roughly 125bps of cuts that were being priced for this year a little over a month ago as markets went way overboard. The dollar is broadly stronger with only the CNH and CNY also firming. Oil is up by over 3% and gold is down by over $100.
The US and China agreed to step back from some of their tariffs on each other for a period of 90 days. The US will temporarily drop its tariffs to 30% from 145% and China will reduce its duties to 10% from 125% which is better, but still punishing with huge caveats.
For one, all tariffs prior to April 2nd when Trump’s trade wars escalated will remain in place, including sector-specific US tariffs on Chinese EVs, solar panels, semiconductors, steel and aluminum and select other goods. De minimis exemptions are still gone as of last week, slamming low-value trade. China’s other measures such as restrictions on critical minerals, and measures targeting individual US companies also remain in place.
For another, a 90-day suspension obviously leaves great uncertainty in place. Will Trump and Xi JinPing put rings on each other’s fingers and, if so, would the engagement last? This is not a deal, it’s just a de-escalation of tariff lunacy and we’ve seen temporary deals fall apart in the past. None of the core issues are being addressed.
Third, it’s unclear that 30% plus pre-existing tariffs doesn’t still grind US-China commerce to a halt. Worsened data, product shortages and inflation are still coming.
So, celebrate for now, but the volatile history of relations between these two countries combined with Trump’s extremely erratic ways will leave markets on tenterhooks into the mid-August timeframe by which point either some heroic attempt at a grand deal is miraculously pulled off in record time, or we’re back at it all again.
There is one sector not celebrating, however, as Big Pharma doesn’t like Trump’s plans to sign an executive order this morning to address soaring prices (chart 1). Trump claims he’ll cut pharmaceuticals prices by 30–80% by implementing a most-favoured nation policy to pay no more than people in countries that have the lowest price. No details at all, not least of which whether we’re talking government-run programs or broader reductions, which drugs, and how it would be executed. All hubris in my opinion. If successfully pulled off it would probably drastically impact access to drugs in the US and future innovation.
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