Initial enthusiasm may have waned but US stocks are still comfortably above their pre-Liberation Day levels following a de-escalation in the tariff stand-off between the US and China.

A 90-day reduction in US tariffs on Chinese imports from 145% to 30% and Chinese tariffs on US imports from 125% to 10% was better than many in the market had expected and helped drive considerable enthusiasm on Wall Street on the 12 May with Bitcoin also within sight of its previous record high of $109,000.

While the range of possible outcomes remains wide, investors clearly like the direction of travel and assume Trump has taken the off-ramp available to him from a fully blown global trade war.

Signs of some lingering reticence in the markets may reflect the continuing uncertainty now implied by two deadlines.

The first is on 8 July when the 90-day reprieve for reciprocal tariffs comes to an end – it should become clearer at this stage what deals countries have been able to strike with the US – the UK having been the first to secure a limited trade agreement on 8 May.

Now there is a further key date on the horizon as the 90-day reduction in US and China tariffs concludes on 10 August.

Consultancy Capital Economics says: ‘This is a substantial de-escalation. However, the US still has much higher tariffs on China than on other countries and still appears to be trying to rally other countries to introduce restrictions of their own on trade with China. In these circumstances, there is no guarantee that the 90-day truce will give way to a lasting ceasefire.‘

In this context it is perhaps little surprise to see the Federal Reserve opting to keep its powder dry, holding rates steady at its latest meeting on 7 May.

Even if the reduced level of tariffs on China and other countries becomes permanent, this would still leave the US with a significantly more protectionist trade policy than before president Trump entered the White House.

Fidelity head of investment directing for Asia Pacific, Stuart Rumble, says: ‘While neither economy is currently near a breaking point, a meaningful reduction in overall tariffs helps ease that risk.

‘The US administration is likely to continue supporting demand through extended tax relief and other fiscal measures aimed at supporting household spending. China, having spent years preparing for renewed trade tensions by reducing reliance on US exports, also retains the capacity to expand domestic stimulus.’

Rumble adds that the latest developments should help provide support to equity and fixed-income markets in both countries. 

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