U.S. Indices surged on Monday as risk-on trade was seen to start the week amid the positive trade developments between the US and China, whereby both countries agreed to cut tariffs by 115ppts, in what was a much larger drop than expected. The combined 145% US tariffs on China and China’s levies on US goods will drop to 30% and 10%, respectively. In wake of the news, global risk-on trade was seen with downside in fixed income and gold, and upside in the Dollar, US equities, and crude. Given the readout was in the European morning, it set the tone for the duration of the US session with the aforementioned moves firmly holding, with notable gains seen in US indices, and weakness across the Treasury curve. Despite the geopolitical angst, the crude complex was buoyed although benchmarks traded some way off earlier peaks amid potential profit-taking. In FX, the Dollar was bid to the detriment of G10 FX peers, although safe-havens (JPY, CHF) lagged, and high beta FX were the relative outperformers given the risk environment. As expected, trade headlines dominated the slate and there was little else new with no US data and a lack of pertinent Fed speak. However, US President Trump signed an executive order on drug prices and they could come down from 59% to 80-90% and he will no longer tolerate profiteering from Big Pharma. The US and China agreed to reduce tariffs by 115ppts for 90 days. In the joint statement, it noted the US is to cut tariffs on Chinese goods to 30% from 145% and China to cut tariffs on US goods to 10% from 125% for 90 days. The US will modify the application of rate of duty on articles of China by suspending 24ppts of that rate for an initial period of 90 days. The US will retain the remaining rate of 10% on those articles; China is to retain the remaining ad valorem rate of 10% and remove the modified rate. Throughout the day US Treasury Secretary Bessent had numerous appearances, where he noted over the next 90 days they will see, but has to be fair for the American people. When asked if he considers the new level a ceiling or a floor, stated it “is obviously a floor”. Said the 34% April 2nd level is a ceiling. Not saying tariffs will go up, but it is implausible that the tariff level will go below 10%. The first level is that there will be a phone call with Trump/Xi, and there is nothing currently scheduled. Can always go back to April 2nd level for China tariffs. The 20% fentanyl tariff imposed by the US will remain, with Bessent believing China is now serious about halting fentanyl flows in the US. USTR Greer said as it stands, the fentanyl issue remains unchanged. In addition, Reuters sources noted that the US-China trade deal does not cover “de minimis” exemptions for e-commerce firms and White House Press Secretary Leavitt said unfreezing rare earth was part of US-China discussions. Fed Member Goolsbee said tariffs would still have a stagflationary impulse, the New York Times reports, and the temporary nature of the US/Chian deal would weigh on the economy. The bar for action has to be high, and again endorsed the waiting approach due to uncertainty and the central bank could afford to take time for policy decisions. Meanwhile, Kugler said trade policy is shifting but still likely to lead to higher prices and slower growth; it has become hard to judge the underlying growth of the economy. On inflation, she noted progress on disinflation has slowed, and still expects an increase in prices and slowdown in the economy, though not to the same rate as before. Additionally, she believes there could be some permanency from price increases related to tariffs. On the labour market, stated conditions are mostly stable. Regarding policy/rates, the Fed is in a good position to deal with changes in the macroeconomic outlook. Lastly, on tariffs, said if long-lasting, she would look into how supply chains get rearranged in the rest of the world, and remarked the US/China tariff reduction is obviously an improvement as far as trade between countries goes, still pretty high. Elsewhere, Oil closed 1.3% higher while Gold was weak, ending Monday’s session with a 3% loss.
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