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Rome ain't burnin' just yet: US-China trade talks ignite market hope
Sparked by an unexpected announcement, Asia's stock markets basked in a wave of optimism on May 7 after China agreed to hold trade talks with the United States. The talks, tentatively scheduled for the weekend in Switzerland, have fanned the flames of hope that the superpowers might be able to roll back the crushing tariffs that have raised alarm bells about a potential global recession.
China's decision to ease some crucial monetary policy tools aimed at kickstarting the world's second-largest economy has sent investors reeling with relief, providing a much-needed respite from the punishing blows inflicted by US President Donald Trump's explosive first few months in office.
Behind the scenes, US officials have been locking horns with numerous countries in a desperate bid to avoid Trump's broad-spectrum levies. Japan and South Korea have been among the first in line, but China has remained strangely absent from the discussions—save for a few ambiguous remarks hinting at ongoing talks.
However, this changed with the announcement that top US representatives, including Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer, will meet with Chinese Vice Premier He Lifeng. According to Bessent, the meeting is poised to lay the groundwork for a more in-depth discussion focused on de-escalating the ongoing trade war rather than hammering out a comprehensive deal.
"We will agree on what we're going to talk about," Bessent told The Ingraham Angle show. "My sense is that this will be about de-escalation, not about the big trade deal. We've got to de-escalate before we can move forward."
In response, China's commerce ministry pledged to defend its principles and actively contest any unfair tactics during the negotiations. The ministry also warned that the US must acknowledge the devastating impact its unilateral tariffs have caused, both domestically and globally. If the US attempts to coerce or blackmail China under the guise of talks, China will not cave, the ministry said.
Trump has imposed new tariffs totalling 145% on goods imported from China, some of which are accompanied by sector-specific penalties. In response, China has retaliated with 125% tariffs on US imports, along with more targeted measures.
Although the news of the impending talks sent shockwaves through stock exchanges, with most markets closing in the green, the relief was tempered by lingering economic woes. Both economies are grappling with weakened consumer and business demand. While China has unveiled new stimulus measures, such as loosening credit, analysts express reservations about whether these moves alone will be enough to trigger a sustained economic recovery. The current tariffs are seen as untenable by U.S. officials, and both sides understand the need to find a way to shrink them, albeit a complex and time-consuming process.
Investors were also heartened by China's decision to trim a key interest rate and allow banks to hold less cash in reserve—a move aimed at boosting lending. The People's Bank of China also announced plans to cut the rate for first-time home purchases with loan terms over five years as it grapples with a crisis in the property sector that has taken a heavy toll on economic growth.
"The market has been expecting for monetary stimulus since the start of the year to boost credit growth and counteract external uncertainty," said David Chao at Invesco. "Therefore, today's rate cuts are likely to appease the market's hunger for stimulus, at least for a while."
Back in Washington, the Federal Reserve is expected to maintain interest rates later today, although investors will be scrutinizing the post-meeting statement for insights into the Fed's future plans in light of Trump's tariffs and relentless pressure to lower rates further.
Meanwhile, the rising tension between nuclear-armed Pakistan and India over their disputed border captured headlines as both countries exchanged heavy artillery fire. The clashes followed a deadly attack on the Indian-controlled side of Kashmir that India blames on Pakistan, escalating tensions between the two countries.
"Just as everyone's throwing in the towel — calling end-of-days on the "Trump Trade War" — the White House quietly unleashes a "trade deal" teaser to yank markets off the cliff," said Stephen Innes of SPI Asset Management. "Traders who'd battened down the hatches are now scrambling to hoist sails, chasing any whiff of tariff relief like it's pure alpha."
- The news of the upcoming US-China trade talks, announced unexpectedly, has ignited a strong wave of optimism in Asia's stock markets.
- China's decision to ease some monetary policy tools and trim a key interest rate is aimed at strengthening the economy, particularly the finance and industry sectors, in anticipation of the trade negotiations.
- The trade talks, scheduled to take place between top US representatives and Chinese Vice Premier He Lifeng, are expected to focus on de-escalating the ongoing trade war rather than hammering out a comprehensive deal.
- Investors are expressing reservations about whether China's new stimulus measures, such as lowering credit and interest rates, will be enough to trigger a sustained economic recovery, especially given the crushing tariffs imposed by both countries.
- The US and China acknowledge the need to shrink the current tariffs, although finding a way to do so is seen as a complex and time-consuming process.
