The US and China have issued a joint statement announcing a temporary reduction in tariffs. The US will cut tariffs on Chinese goods from 145 per cent to 30 per cent for a 90-day period, while China will lower its tariffs on US imports from 125 per cent to 10 per cent over the same timeframe. Equity markets have responded positively, with Chinese and Hong Kong stocks rallying to the news. 

This short-term reprieve is an encouraging signal for markets and should help restore some confidence. However, while the headline tariff cuts are sharp, they are also time limited. But for now, sentiment may matter more than substance for market confidence - and domestic political support - than the content of any substantive agreement. So, what should investors take away from this announcement? 

First, although the reductions are temporary, they represent a notable shift in the overall effective tariff burden. The high US-China tariff regime has already caused major disruption, reducing bilateral trade between the world’s two largest economies and increasing the risk of a broader global slowdown. While neither economy is currently near a breaking point, a meaningful reduction in overall tariffs helps ease that risk. The US administration is likely to continue supporting demand through extended tax relief and other fiscal measures aimed at supporting household spending. China, having spent years preparing for renewed trade tensions by reducing reliance on US exports, also retains the capacity to expand domestic stimulus. These developments, coupled with lower trade barriers, should be supportive for both equity and credit markets. 

Second, even with these tariff cuts, much of the shift in global trade flows has already begun. The decline in direct US-China trade has driven increased rerouting through Southeast Asia and other so-called third countries. Tariff differentials remain relevant and will continue to shape trade flows based on relative competitiveness, infrastructure capacity, and domestic policy responses. While these structural shifts will take time to materialise, as companies adapt their supply chains and logistics, they are important for investors considering their allocations to Asia. 

Lastly, while encouraging, this development perhaps should be seen by investors as an easing of tensions within a broader, long-term shift in the US-China relationship towards greater self-sufficiency. 

Investment implications from Matthew Quaife, Global Head of Multi Asset

We see this is as a positive development and an alleviation of the pressure following the announcements from the US on ‘Liberation Day’. This unwinds some of the damage but is not a wholesale restoration of economic growth, given the still persistently high levels of uncertainty. Nevertheless, some of the worst-case scenarios look to have been averted. 

Cash set aside as dry powder could be used to unwind hedges or added back to risk assets following this de-escalation, but we would avoid a wholesale rerating of risk appetite and remain around neutral. We maintain our long duration position to mitigate any growth concerns as some of the hard data may moderate during this period.

Global Macro views

These announcements are likely to lead to a more benign economic outlook. We have trimmed our combined stagflation and recession probability to 60 per cent (from 90 per cent previously), with 40 per cent for stagflation and 20 per cent for a recession. Our probability for a reflation-light scenario has increased to 40 per cent (from 10 per cent earlier).

In the stagflation scenario, given these tariff rates are still nearly six times the 2.3 per cent tariffs that were in place in 2024, we expect inflation to increase by 90 basis points in the US, raising it to 3.5 per cent  over the course of the year, and expect growth to weaken by 1.2 percentage points, falling to under 1 per cent over the course of the year,  as a result of continued high uncertainty, price shocks, and weak consumer demand.

The reflation upside scenario stems from the front-loading of tax cuts and deregulation. This combination would boost demand in the short run and create a sustainable path to higher growth in the long run as regulatory constraints on supply diminish. Whereas the downside recession scenario would likely come about as a result of trade deals falling apart again, reinjecting higher uncertainty and the risk of product shortages.

Looking ahead to the upcoming negotiations between the US and China, we expect more sticking points to emerge, particularly around rebalancing manufacturing away from China, currency manipulation, eventually lowering the trade deficit, and reducing reliance on China in strategic sectors.

While US Treasury Secretary Scott Bessent stated in his briefing that neither country wants to decouple, we think the undertones still clearly suggest that a managed decoupling is in place and that the world will continue to fragment. The UK trade deal featuring a 10 per cent baseline tariff (plus carve-outs for specific sectors) is likely to prove the best deal available, and other countries may see this as the floor for their own tariff rates. 

The focus from now will be on how soft data responds to the optimism, and how much damage the front-loaded hard data gives away. While we have less conviction on the growth outlook, we have much more confidence that inflation will overshoot its target. Accordingly, we remain of the view, which we have held all year, that the US Federal Reserve will not cut interest rates this year (barring a recession). Market pricing has trimmed expectations of rate cuts down from four cuts at the start of May to almost two cuts now.  

China macro outlook

China is now in a better position to defend its growth targets as a result of tariff relief. We maintain our base case of ‘controlled stabilisation’ and expect no change in China’s goal of using incremental and reactive easing policies to achieve stable growth. The tariff pause will greatly reduce the urgency for additional fiscal stimulus in the short term, and it reduces the probability of further fiscal easing at the July Politburo meeting. We expect policymakers to renew their focus on the pace of domestic demand recovery, especially in consumption.

However, risks of re-escalation will still linger as negotiations take place. The bar for achieving significant progress in a comprehensive trade deal is high, and ‘managed de-coupling’ is our base case for US-China relations. Additionally, as Bessent highlighted in the press briefing, both sides acknowledge the importance of rebalancing. We think greater expectations will be put on China’s effort to pivot into supporting domestic demand, while pulling back on the support to supply-side investments such as stimulus or favoured credit policies for tech and manufacturing sectors. To date, China’s easing has focused more on supporting the supply side, exerting large deflationary pressures in the domestic economy and its export destinations. We think these deflationary pressures will remain if demand shock risks linger.