China and the U.S. may not have buried the hatchet in their trade war, but at least they have found common ground. Tensions have eased, and for the next 90 days, Chinese goods shipped to the U.S. will be subject to tariffs of at least 30%, while U.S. exports will face tariffs of at least 10%. In response, markets rallied.
Subsequently, markets rose in the wake of the news: the S&P 500 closed Monday up 3.26%, the Dow Jones rose 2.81%, and the Nasdaq 100 soared 4.02%. Bitcoin price also rose, surpassing the $105,000 barrier. But judging by the red opening of U.S. index futures the next day, the optimism seems mostly discounted.
Now, the focus is on President Trump's negotiations with the European Union, especially in light of his comments that the EU is worse than China in many respects. The good news is that, as we have seen over the past two months, negative sentiment can quickly turn to optimism, and markets could rally again.
Some big optimists, in turn, expect that the White House's trade wars could end within a month, if the World Trade Organization and, more importantly, domestic judges decide to stop Trump's tariffs. If the court agrees these tariffs are unconstitutional, Trump's entire tariff strategy could sink. But the likelihood is low.
There is also a risk that this tariff saga could drag on for many months, if not years, which would be detrimental to the U.S. economy and the global economy and, consequently, to the markets. For now, however, this scenario seems to be ignored, as markets continue to rise as if all problems have been resolved.
That said, not everyone is driven by blind optimism: US government bond yields did not fall after the US-China tariff reduction agreement; instead, they rose. This contradicts expectations, as one would assume that lower tariffs would reduce inflationary pressures. It seems that some investors remain cautious.
This could be a way of saying that the tariff saga is far from over. If so, market confidence in risk assets could also change rapidly. Analysts are already warning that recent market moves are not sustainable and are advising caution to avoid falling into the greater fool's trap and getting caught with overvalued assets.