Brooks Macdonald - 'The Friday Wrap' - 16th May 2025

Equity markets rally on US-China tariff pause

News this week of a 90-day pause in tariff hostilities between US and China has dominated the narrative for investors. It has led to another gain in equity markets this week, extending their bounce from April lows. Meanwhile, over in government bond markets, there was a general fall in bond prices as yields over the first part of the week rose to reflect a quashing of near-term economic recession fears. However, tariff fears were not just about economic growth impacts, they were also about fears of stoking inflation pressures - but here too, we have seen better news this week - weaker than expected US consumer and producer price inflation prints have kept hopes alive for rate rates later this year, softening some of those earlier government bond yield moves, both in the US and over in Europe too. All in all, we have to keep in mind that a pause in tariffs is just that – a pause, but for now, markets appear to be giving the benefit of the doubt that despite lingering tariff uncertainty, that ‘peak tariff fear’ might hopefully be behind us.

It’s good to talk

This week saw US and China announce a 90-day period of lower tariff rates. The US has cut levies on Chinese goods to 30% from 145% for 90 days, while China has lowered its levies on US goods to 10% from 125% for the same time period. Perhaps the most telling detail around the outcome of the talks earlier this week came from US Trade Representative Jamieson Greer, who noted that it was “important to understand how quickly we were able to come to agreement, which reflects that perhaps the differences were not so large as maybe thought.” If this proves to be the case, that 90-day period of lower tariff rates might lead to something more permanent. As such, it could pave the way, in the short-term at least for another leg of recovery in investor risk appetite, but risks remain – not least that, for now, these tariff rates are only paused, not cancelled.

US equities back in the black

After a huge gain in US equities over the past 5 weeks or so, this week has seen the US S&P500 equity index back in positive territory for 2025. US megacap tech stocks have once again led the markets, with Nvidia jumping this week on news the company is set to be a major beneficiary of Saudi Arabia’s Artificial Intelligence infrastructure capex plans, announced as part of US President Trump’s latest Middle East tour this week. Nvidia’s share price, as of yesterday (to the close on Thursday 15 May) is now up a massive +55.66% versus its intraday low on 7 April. The broader US Nasdaq 100 technology index meanwhile is officially back in a bull-market, defined as a rise of 20% or more from a previous low (all in local currency price return terms).

Two steps forward, one back?

While markets were rightly focused on the US-China trade deal details this week, it was not universal good news for all sectors. US President Trump this week signed a fresh executive order, this time around pharmaceutical pricing. In it, Trump is seeking to cut prescription prices to the level paid by other high-income countries, an amount he put at between 30% - 80% less, to pursue what is known as "most favoured nation" international reference pricing. However, as we have seen from Trump’s other policy initiatives, it is not clear whether this latest announcement will stick – in addition, it is not clear whether those pharmaceutical companies impacted would seek to raise prices outside the US rather than cut US pricing.

What does Brooks Macdonald think

Against the near-term relief that tariff pauses have delivered for both economies and markets, the fact remains that this relief is temporary for now – it might be an obvious point to make, but tariffs have been paused, not cancelled. Specifically, the tariffs were only paused for 90 calendar days for most of the world (ending 8 July - day 91 - assuming 9 April was day 1), and for China (ending 10 August – day 91, assuming 12 May was day 1). That means that unless negotiations leading to new permanent arrangements can be signed-off ahead of those cliff-edge dates, we could see a return to higher tariffs and renewed trade volatility. Yet, near-term, despite this tariff uncertainty, there is, perhaps counterintuitively, a positive risk that economic activity could be much stronger than expected over the next few months. Why? Just as we saw up-front inventory buying from businesses ahead of 2 April as they tried to get ahead of tariffs, there are two more cliff-edge dates coming up – in July and August. Given the risk of renewed tariff angst, businesses may well consider front-loading purchases again – while that trade distortion might give a temporary boost to economic activity in the short-term, it doesn’t make the longer-term outlook any clearer unfortunately.

Source: Brooks Macdonald

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