Trade war ceasefire gets global welcome

A 90-day ceasefire was agreed upon as a result of the China-US trade talks in Switzerland, with the US reducing its tariffs on China to 30 percent and China reducing its tariffs on the US to 10 percent.

This was a larger-than-expected de-escalation and represents an upgrade to the outlook, though the negotiation process will likely remain challenging.

Investment bank ING said the trade war de-escalation is a win-win as parties bring tariffs back to pre-Liberation Day levels.

The Chinese and US governments released a joint statement following trade talks in Switzerland, announcing a 90-day ceasefire on the trade war, bringing US tariffs on Chinese products back to 30 percent and Chinese tariffs on US goods to 10 percent.

It remains uncertain if the de minimis exemption for products shipped from China and Hong Kong will be restored, or if the minimum fees will remain, according to the report.

These rates return tariffs to pre-Liberation Day levels and represent a better-than-expected de-escalation, Lynn Song, ING chief economist for Greater China, said.

Many market participants expected a de-escalation to near the post-Liberation Day tariffs of around 50 percent to 60 percent, which would have been a more minor boost to Chinese exports.

Although the trade war de-escalation benefits both economies, the agreement, which significantly lowers tariffs without any concessions, is likely to be viewed as a particular victory for China.

China had previously demanded a tariff reduction before negotiations, which now seems to have been achieved.

China’s response following the April escalations showed that it was prepared for an extended test of endurance if necessary.

ING said China’s April trade data may have strengthened its hand heading into the Switzerland negotiations.

The data showed that despite the 145 percent tariff hike, and talks of a de facto embargo and hard decoupling, exports to the US only fell 21 percent year-on-year in April, implying that significant tariffs were being paid by US importers.

Before Trump’s Liberation Day surprise prompted a retaliation, ING noted that China’s prior responses to US tariff escalations had been quite measured to preserve the possibility for negotiations.

Restoring tariff levels to this state has once again opened the door for those negotiations to continue. We previously believed that the fentanyl issue is one where there could be an area of cooperation, and indeed this was an area highlighted by US Treasury Secretary Scott Bessent after the Switzerland talks.

De-escalation to upgrade China’s outlook

Reduction of tariffs on China back to 30 percent is a sufficient reduction to allow for a more or less return to normal trade.

At this level, we suspect exporters, importers, and consumers will share in absorbing the impact of the tariffs, and overall, business will likely resume. Looking back, the 20-30 percent tariff level through the first quarter saw exports to the US rise around 5.0 percent YoY, though this may be skewed to the upside due to trade frontloading.

The 90-day ceasefire will upgrade our second and third quarter growth outlook in terms of its impact on China’s growth. We suspect that China’s May and June exports to the US will bounce back sharply as importers with depleted inventories will take advantage of the ceasefire to resume imports.

Depending on how talks proceed, we could see a frontloading of exports again in July and August, especially if there is not much clarity on a longer-lasting bargain being struck heading into the later stages of the 90-day period.

“We are reverting our forecast for the year back to 4.7 percent, with further upside possible if a bilateral agreement is reached within the 90-day period.”

The market’s immediate reaction to the yuan has been a modest strengthening of the Chinese currency against the dollar.

Risk premium leaves the dollar

Today’s news of a temporary reduction in US-China tariffs has been very much welcomed by the dollar. With global equity markets rallying 1-2 percent, it has been the defensive Japanese yen and Swiss franc which have suffered the heaviest losses against the dollar — effectively reversing their gains seen in the aftermath of the chaos of ‘reciprocal’ tariffs. In terms of positioning in FX markets, long yen has been one of the most crowded trades and the USD/JPY rally could have further to run — perhaps to 150.

EUR/USD has also fallen hard. Remember the euro’s strength in April was seen to be a function of its liquidity as dollar aversion grew. The current EUR/USD correction could extend below 1.1100 to the 1.10 area, but we suspect any moves sub-1.10 will not be sustained. After all, we’re still waiting to find out what impact the tariff story has had on US consumption. And perhaps more importantly, the German fiscal stimulus story is real.

At present, our base is that EUR/USD trades out a rough 1.10-1.15 range for the rest of the year, helped in part by lower energy prices.

Rates markets: euphoric

We’ve seen quite the market euphoria on the back of a potential deal between the US and China.

The 2Y swap rate is up almost 10bp, bringing the ECB landing zone back to 1.75 percent, which we think is fair. The 10Y Bund yield is up some 7bp today, now above 2.6 percent again. That level is still far from the 2.9 percent yield from pre-Liberation Day, however. Whilst we structurally think we could head back to those yields, there is still too much uncertainty outstanding to head there in the near term.

In US markets, we see the 5Y UST yield jump up almost 10bp in Asian and European trading hours, reflecting improved sentiment on the economic outlook in the medium term. US CPI numbers are expected to come in quite hot on Tuesday, keeping US rates supported. The rest of the data calendar is relatively empty, which means positive headlines can remain the main driver of global rates. Until told otherwise by data or headlines, the upward pressure on rates can hold for now.