Daily market update: markets rally, US-China trade talk, India-Pakistan ceasefire

“Markets have welcomed the tentative US-China trade agreement with open arms,” says Russ Mould, Investment Director at AJ Bell.

“While the trade spat has only been dialled back for 90 days, it’s a major breakthrough as far as investors are concerned. The fact the two countries were talking was already a major win given they’ve been at each other’s throats during the first and second Trump presidential terms.

“Some people thought the best-case outcome from the weekend’s discussions would be an agreement to simply keep talks going. Therefore, to have reached an initial deal so quickly and one that rolls back tariffs by a large amount is a pleasant surprise.

“The UK-US trade deal last week made it perfectly clear that Trump wasn’t going to get rid of tariffs completely. If one of its greatest allies is forced to still have a 10% base tariff, there is no way that tariffs on China would have disappeared completely upon a trade deal.

“Lowering tariffs on Chinese goods from 145% to 30% is a big deal and one that significantly lessens the blow to the Asian economy. As ever, it’s clear that these deals aren’t even sided. China is cutting duties on US imports from 125% to 10%. That’s the same percentage point reduction as on the other side of the coin, but the US is still subject to lower tariffs.

“The next 90 days are going to be crucial in determining the longer-term tariff levels between the two countries. It would only take China upsetting Trump once for him to rip up the 90-day deal and revert back to sky-high tariffs. China won’t want to come across as weak in any discussion and is certainly not a push-over, yet it will be cognisant of the situation’s fragility.

“Trump has shown he is willing to reduce the severity of the Liberation Day tariffs and that has raised hopes for other countries to secure more favourable trade deals. All this points to the potential for a less severe hit to global trade and lower fears of recession. That in turn has put investors in risk-on mode.

“Futures prices imply a strong day for US markets, with the Nasdaq indicated to rise by 3.3% and the S&P 500 by 2.5% when Wall Street opens for trading later today. Asian markets enjoyed a bounce, including a 3% rise in the Hang Seng. European markets also rallied with a 1.4% jump in the Stoxx 50 index.

“The outlier was the FTSE 100 which was flat at 8,554. The US-China trade deal triggered a 1.2% jump in the DXY, an index which measures the value of the US dollar relative to a basket of foreign currencies. A big chunk of the FTSE 100’s members’ earnings are in US dollars and strength in the currency works as a negative factor when translating those earnings into pounds.

“US dollar strength is often the root cause of underperformance for the UK market, but that’s not the case today. There is a different reason as to why the FTSE 100 has lagged its peers and that’s down to investors recalibrating portfolios to have more exposure to economically sensitive sectors and less to defensive parts of the market.

“Sectors such as pharmaceuticals, utilities and consumer staples had been in demand since Liberation Day. Today has seen a rotation out of these areas into industries such as banking and mining that should benefit if global trade isn’t damaged by Trump’s policies as much as previously feared.

“There are other reasons for investors to be more optimistic, such as a ceasefire between India and Pakistan, and Ukrainian president Volodymyr Zelenskyy saying he is ready to meet Russian president Vladimir Putin. A de-escalation of these conflicts would be welcomed by investors around the world.”