China Tariff Cut Fuels Market Boom (But Volatility Looms)

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The Big Picture

International Markets

Global Markets Surge as U.S. and China Slash Tariffs in Landmark 90-Day Deal

The U.S. and China have agreed to slash tariffs on each other's goods for 90 days, significantly easing trade tensions between the world's two largest economies. The breakthrough comes after high-stakes talks in Switzerland and is expected to provide short-term relief to businesses on both sides.

Under the deal, reciprocal tariffs will drop from 125% to 10%, although U.S. duties on Chinese imports related to fentanyl will remain at 20%, maintaining an overall 30% tariff level on those products. This pause in tariff escalation is set to begin this Wednesday, with both sides agreeing to continue discussions on longer-term trade policies.

The deal's immediate impact was felt across financial markets. U.S. stock futures surged. Global markets also rallied, with the pan-European Stoxx 600 climbing around 1% in mid-morning trading, reflecting broader investor optimism.

While this 90-day reprieve is a welcome break for global trade, the broader economic implications remain uncertain, particularly for sectors like manufacturing and technology that have been heavily affected by the tariff disputes.

We will closely watch how these temporary measures influence supply chains, corporate earnings, and consumer sentiment as the two sides work toward a more comprehensive agreement.

Oil Markets

U.S. Energy Sector Faces New Pressure as Saudi Aramco Earnings Signal Shifting Oil Dynamics

Saudi Arabia’s state-owned oil giant Aramco reported a 4.6% drop in first-quarter profits, pulling in $26 billion amid falling global oil prices. The earnings dip comes as the U.S. prepares to absorb a potential $600 billion in Saudi investments, a commitment Crown Prince Mohammed bin Salman made as part of broader economic ties.

Aramco remains a critical player in global energy markets, and U.S. oil firms closely watch its financial moves. The company’s recent earnings decline is partly linked to softer oil prices, with benchmark Brent crude trading at just over $63 a barrel, down significantly from last year’s highs of over $80.

The timing is notable. The OPEC+ alliance, led by Saudi Arabia and Russia, recently agreed to increase oil output by 411,000 barrels per day, a move that could pressure U.S. shale producers by flooding the market with cheaper crude.

This production boost, set against a backdrop of U.S. tariffs and uncertain global trade dynamics, has the potential to reshape oil supply chains and influence American energy exports.

As Crown Prince Mohammed bin Salman pushes ahead with his $500 billion Neom mega-city and other costly projects, Saudi Arabia may increasingly look to the U.S. for investment and financial support. This could potentially shift the balance of energy trade and create new risks for U.S. oil firms.

U.S. policymakers will be watching closely as Aramco maneuvers through these market dynamics, which could impact American energy independence and broader geopolitical stability.

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Global Trade

Japan Signals Leverage Over $1 Trillion in U.S. Treasury Holdings

Japan's $1 trillion in U.S. Treasury holdings, the largest foreign reserve of U.S. government debt, has surfaced as a potential leverage point in ongoing trade talks with the United States.

Japanese officials indicated that these holdings, while primarily maintained for domestic financial stability, could factor into broader economic discussions with Washington.

The potential for Japan to adjust its U.S. Treasury strategy carries significant implications for U.S. debt markets. Reducing Japan's U.S. bond holdings could put upward pressure on U.S. interest rates, complicate Treasury financing, and add volatility to global bond markets.

Given the size of Japan's holdings, even a modest shift in strategy could ripple through global financial systems, impacting everything from U.S. borrowing costs to foreign exchange rates.

For the U.S., this development underscores the interconnected nature of global capital flows and the delicate balance of economic diplomacy. Japan's Treasury holdings have long served as a stabilizing force in U.S. financial markets, providing liquidity and helping to keep borrowing costs in check.

However, if Tokyo is willing to adjust this position, it could introduce a new layer of complexity to U.S. fiscal planning when debt levels are already a growing concern.

With trade discussions ongoing, U.S. policymakers may face increased pressure to consider the broader financial implications of their negotiations with key allies like Japan.

Metrics to Watch

• China Tariffs: Treasury Secretary Scott Bessent announced a steep drop in China-produced goods tariffs, down to 30% from a whopping 145%.   

• Reciprocal Action: Likewise, China trimmed its reciprocal retaliatory tariffs down to 10%, from 125%. Both reductions are in effect for the next 90 days as trade talks continue. 

• Worker Productivity: That said, there’s still some economic catching-up to do, considering U.S. worker productivity cratered post-tariffs, dropping for the first time since 2022 by 0.8%.

• Recession Risks: The uphill climb shouldn’t be too steep, though, as jobless claims fell by 13,000 last week with “no sign of recession or layoffs” on the immediate horizon, per reports.

Market Movers

🇨🇳🇺🇸 A Trade Truce (For Now): As we said up top, a 90-day cut in reciprocal tariffs sent markets surging and firmly out of bear-market territory, with President Trump saying that negotiations “achieved a total reset with China.” Stocks went up, yields stabilized, and gold prices dropped - just remember that volatility should still be your watchword - today’s gains could just as easily reverse by tomorrow if negotiations sour. 

💊 Big Pharma Back in the Spotlight: President Trump has Big Pharma in his sights next, aiming to cut prescription-drug prices nearly across the board per a recent executive order. Shares in major pharmaceutical manufacturers and healthcare stocks like Johnson & Johnson (NYSE: JNJ) and AbbVie (NYSE: ABBV) dipped immediately following the announcement before climbing back up, indicating, perhaps, that traders forecast an eventual “middle ground” proposal from the administration.

🛍️  Keep an Eye on Consumer Spending: Retail stocks, of course, suffered mightily in the immediate post-tariffs short term; expect a major emphasis on forward-looking statements and outlook from Walmart (NYSE: WMT) and Target’s (NYSE: TGT) earnings later this month. They’re already in troubled waters, though, according to the Fed’s New York President John Williams, who said that “consumers are starting to pare back spending,” signaling wider economic shocks coming.

🍎 Apple Onshoring? In a post-China tariff cut announcement, Trump said he spoke with Apple (NASDAQ: AAPL) CEO Tim Cook, and that Cook planned to “be building a lot of plants in the United States for Apple.” Whether this is the case remains to be seen, as well as the true scope, but it further reinforces the fact that a push for on-shoring paid off in droves across market sectors.

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*The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research’s newsletter editors and may represent the partial close of a position.
*This free resource is being sent by Zacks. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service".

Market Impacts

Equities: Magnificent 7 stocks added nearly $700 billion in market gains following the tariff pause, while bank stocks surged and retailers ticked upward. What’s next is anyone’s guess, though - while Trump said that full-scale 145% tariffs are entirely off the table, negotiation breakdowns later this week could crater the renewed optimism across equities. 

Bonds: Bond markets remained cool, however, with yields remaining fairly high, indicating fixed-income traders are skeptical of the reversal and still need their “uncertainty premia” before committing to Treasuries. Bond markets are less prone to “good PR” moves than equities, indicating some skepticism within sophisticated investor classes about whether these negotiations will have a material payoff.      

Currencies: Short positions in the dollar were near all-time highs before the tariff cut, creating a mini-short squeeze across currency markets as the dollar’s value exploded. The DXY index crossed the 100 BPS gain line early Monday, though it remains well below January levels.  

Commodities: However, haven assets like gold and precious metals weren’t so lucky, with traders switching to risk-on assets and dropping gold prices by 3%+. On the flip side, the tariff talks could signal a renewed boost in rare earth metals if China ditches its current export ban as part of the wider agreement.

Key Indicators to Watch

• 📅 Inflation (April)  – May 13th: Some skeptics claim the push toward trade negotiations signal an imminent bad inflation print in this week’s report.  

• 📅 U.S. Retail Sales (April) – May 15th: Dropping the same day as Walmart’s earnings, lagging sales last month could put retail stocks on the defensive.  

• 📅 Home Builder Confidence Index (May) – May 15th: Tariff cuts won’t solve housing supply issues, making this market less affected by the good news this week.

Everything Else

• Anheuser-Busch is the latest company pushing toward increasing domestic production. 

• The most avowedly green states, Oregon and Washington, are lagging far behind their less enthusiastic peers (like Iowa) when it comes to green energy expansion. 

• Young Americans feel increasingly disconnected from the “strong economy” narrative than ever. 

• Trump’s major goal for pharmaceutical reform centers on getting Medicare to pay claims more closely aligned with foreign drug costs. 

• Traders are betting on two rate cuts this year, factoring in the improvements in the trade war - but tomorrow’s CPI print could change that outlook.

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