Global Markets Weekly Wrap KW 20 : Global Markets Surge as US-China Ease Tariff Tensions
Stocks in the United States climbed sharply over the week as investors responded positively to developments in trade discussions between the United States and China. The improved mood in financial markets followed a major shift in the relationship between the two global economic powerhouses. Over the weekend, representatives from both countries met in Switzerland and reached an agreement that marked a substantial step back from the previously escalating trade conflict. This development encouraged buying activity across U.S. equity markets, lifting most major indices. Technology-focused stocks, in particular, stood out as top performers. Other market segments also experienced gains, continuing a trend of rising prices that had persisted for several weeks.
The breakthrough in trade relations includes a mutual decision to pause many of the tariffs that were recently imposed. For a period of three months, the United States and China have agreed to hold off on further tariffs while they continue to negotiate. This move is expected to reduce the level of duties on goods flowing between the two countries. The lower tariffs are viewed as a relief by businesses and consumers alike, as they can reduce costs and improve global supply chain efficiency. Additionally, the agreement between the nations appears to have had a positive impact on investor confidence, pushing major stock indices to recover from earlier declines.
The optimism was further reinforced by other global trade-related news, including an agreement that allows a Middle Eastern country to purchase advanced technology products from American firms. This development added to the momentum of the week's market rally and supported the sense of progress in international commerce. By the end of the week, many indexes had returned to levels last seen at the beginning of April, with investors regaining confidence in the strength of the U.S. economy.
Macroeconomic data released during the week also contributed to the bullish tone. Inflation data showed a cooling trend, suggesting that price pressures may be easing. A key government report indicated that consumer prices rose more slowly than expected in April, marking the slowest pace in several years. This news was welcomed by markets as it could reduce pressure on the central bank to raise interest rates further. In the same report, the increase in prices excluding volatile categories such as food and energy also came in below forecasts.
Another report tracking wholesale prices showed a surprising decline. Analysts noted that this drop was driven in part by narrowing profit margins, which could mean that businesses are absorbing some of the additional costs rather than passing them on to consumers. This dynamic, if sustained, could further help keep inflation in check.
However, not all economic indicators were as encouraging. Retail sales, which track consumer spending, showed only modest growth in April. This represented a sharp slowdown from the previous month's more robust pace. The slowdown was broad-based, affecting several major categories. Observers suggested that consumers may be scaling back purchases following a surge in buying activity that occurred prior to the announcement of higher tariffs.
Another sign of weakening consumer sentiment came from a closely watched survey that tracks public confidence in the economy. The measure fell again in early May, continuing a downward trend that has lasted for several months. A large portion of survey respondents cited concerns about trade policy and the potential for further disruptions to the economy. Worries about inflation also increased, with expectations for future price increases rising noticeably.
In the bond market, U.S. government debt showed mixed performance. Yields on Treasuries moved higher during the week, which weighed on prices. Bonds that are considered safer investments tended to lag behind those with more credit risk, as market participants favored riskier assets in the wake of improved trade news. Municipal bonds, which are typically issued by state and local governments, did better than Treasuries, although they still faced some pressure later in the week due to a busy issuance calendar.
Corporate bonds performed better, particularly those issued by companies with strong credit ratings. These bonds saw gains in the more optimistic trading environment. High yield bonds, which are issued by firms with lower credit ratings, also benefited from the rally in equities. Market analysts noted that new bond offerings were well received, indicating healthy investor demand for higher-yielding securities.
Overseas markets reflected similar optimism. In Europe, shares rose in response to the same trade news that buoyed U.S. markets. A pan-European index recorded notable gains, with individual country indices also moving higher. Germany, France, Italy, and the United Kingdom all saw their stock markets rise. The rebound came as trade tensions eased and prospects for export-driven growth improved.
The British economy showed surprising strength in early-year data, expanding at the fastest pace in a year. Growth was fueled by strong performance in service industries, investment, and exports. At the same time, the U.K. labor market showed signs of loosening. The jobless rate inched higher, and the number of workers on company payrolls declined. Wage growth slowed somewhat, suggesting that inflation pressures may be diminishing, though concerns remain.
Monetary policymakers in the United Kingdom expressed differing views on the inflation outlook. While some officials highlighted the risk of persistent inflation, others advocated for caution in reducing interest rates, noting that the path of inflation remains uncertain and heavily influenced by developments in the labor market.
In the broader euro area, several indicators pointed to strengthening economic activity. Industrial production increased sharply in March, driven by strong output of capital goods and consumer products. Germany contributed significantly to this improvement. Trade data also surprised to the upside, with the eurozone recording a substantial surplus, largely driven by rising exports to the United States. Employment figures showed continued improvement, with job growth accelerating.
In Asia, Japan's stock markets moved modestly higher. The easing of trade tensions between the U.S. and China helped support investor sentiment. Japan continued to push for better terms in its own trade discussions with the United States, particularly around tariffs on automobiles and other key products. Bond yields in Japan rose, reflecting a shift in demand away from safe-haven assets as the global trade picture improved. The Japanese currency experienced some volatility but ended the week close to where it started.
Despite gains in financial markets, economic data from Japan disappointed. The economy contracted in the first quarter, with output shrinking more than anticipated. Weak domestic consumption and reduced demand from trade partners, especially China, were seen as key contributors to the downturn. The central bank lowered its expectations for both growth and inflation but maintained its stance on potentially raising interest rates if future data supports such a move.
China's markets also ended the week higher. Investors responded positively to the resolution of tariff discussions with the United States, which included temporary reductions in import duties. The news was seen as a win for China, as it aligned closely with the country's goals in the negotiations. However, market enthusiasm tapered off later in the week, as hopes for additional government stimulus faded. Some investors had expected that worsening trade conditions would prompt Beijing to launch aggressive support measures, but the easing of tensions reduced that urgency.
Earlier in the month, Chinese authorities had lowered the amount of cash banks must hold in reserve and made a small cut to a key interest rate. These moves were part of a broader effort to support economic activity. Still, as trade talks show signs of progress, there appears to be less pressure on the government to introduce further stimulus in the immediate term.
Elsewhere, in Hungary, inflation data showed a moderate decline, though some analysts believed the figures understated underlying price pressures. Government policies, including price caps on essential goods, contributed to the decline. However, analysts remained cautious, arguing that core inflation may still be rising and that interest rate cuts are unlikely this year.
In Brazil, inflation also rose slightly more than expected in April. While some volatile items such as fuel and travel were cheaper, core prices remained sticky. The report suggested that inflation pressures have not eased significantly, reinforcing the impact of previous interest rate increases on economic activity. The central bank continues to monitor inflation closely, with no strong evidence yet of a broader disinflation trend.