by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an overview of the interim US-China trade deal announced earlier today. News of the deal has been reflected in surging values for all manner of risk assets around the world, but we also note a few words of caution for the longer term. We next review several other international and US developments with the potential to affect the financial markets today, including the latest on the India-Pakistan military tensions and a new proposal from President Trump to cut US drug prices.

United States-China: According to Trump administration officials, the US-China trade talks in Switzerland over the weekend yielded an interim agreement under which both sides would slash their tariffs on each other and dismantle other trade-war measures for 90 days. The three-month deal is designed to give the two sides time to negotiate a new permanent trade structure. In response, global risk markets are surging so far this morning, with futures linked to the S&P 500 price index up more than 3% as of this writing. US bond yields and the dollar are also rising.

• Under the deal, the US will slash its “reciprocal” tariffs on Chinese imports to 10% from the current 125% for the interim period, while China will slash its retaliatory tariffs to 10% from 125%. However, the US will maintain its 20% punitive tariff linked to fentanyl trafficking, which means most Chinese imports will face a tariff of 30%. The US’s product-specific tariffs on steel, aluminum, autos, and some other goods will also remain.
• Under the deal, China will also suspend or cancel some of its non-tariff retaliatory measures against the US, potentially including its clampdown on exporting critical minerals.
• However, despite the market euphoria today, we think it’s unlikely that the administration would allow the US tariffs and trade barriers against China to ultimately settle anywhere near as low as they were before Trump’s second term. If the US’s trade barriers against China were going to revert to their previous low levels, there would have been no reason for the disruptive tariff announcements of the last four months.
• More generally, we think the US is likely to maintain much higher barriers to foreign imports than in the past, sparking major changes in economic dynamics and international capital flows over the long term, including a possible intensification of the capital flight out of the US that has become apparent over the last month or more.
• Indeed, the director of the non-partisan Congressional Budget Office recently warned that the US’s tariff war could discourage foreigners from buying US financial assets going forward, potentially weighing on US economic performance.

India-Pakistan: After four days of cross-border airstrikes and drone attacks, a ceasefire struck by New Delhi and Islamabad early Saturday appears to be holding, despite initial violations by both sides. Even though global investors had taken a surprisingly sanguine view of the conflict between the two nuclear-armed nations, we think the situation bears continued watching and could potentially still upend financial markets if the fighting flares again.

Russia-Ukraine: After publicly expressing his support for the Ukrainian people on Sunday, newly installed Pope Leo XIV today reportedly held a phone call with Ukrainian President Zelensky. According to Zelensky, the conversation was “very warm and truly substantive.” The news shows that Leo XIV may continue to throw his moral weight behind the Ukrainians after his predecessor, Pope Francis, struck a much more neutral tone and sometimes seemed to suggest that Kyiv should capitulate to the Russian invasion.

Turkey: The leadership of the Kurdistan Workers’ Party, or PKK, which has been fighting Ankara for independence and greater Kurdish rights since the 1980s, today said it will give up its military struggle and disarm. While it still isn’t clear that all PKK militants will stop their attacks on the government, the announcement is a breakthrough that could increase political stability in Turkey and help ease US-Turkish tensions. It is therefore likely to provide a boost to Turkish stocks going forward.

South Korea: Illustrating the chaos in the conservative People’s Power Party ahead of the June presidential election, the group on Saturday canceled its decision one week earlier to nominate Kim Moon-soo as its presidential candidate. Party leaders said the move was needed after former Prime Minister Han Duck-soo expressed an interest in the role, upending the consensus for Kim. The PPP’s disarray reinforces expectation that the liberal Democratic Party’s Lee Jae-myung is in the driver’s seat to take over as president.

United Kingdom: Prime Minister Starmer today announced a sweeping reform of the British immigration system that marks a sharp clampdown on inward migration. The dramatic changes appear in part to be a response to surging support for Nigel Farage and his anti-immigration Reform UK party. In any case, the reform shows how even center-left politicians throughout the West, such as Starmer and his Labour Party, are now trying to respond to the rise of populist nationalism in their societies, despite the potential negative impact on labor supply.

• Among other measures, Starmer’s reform ends automatic “settlement,” or permanent legal residency, for immigrants after five years. Instead, immigrants will only get settlement after living legally in the UK for 10 years, unless they can show “a real and lasting contribution to the economy and society.”
• The reform will also tighten work visa rules.

US Drug Industry: Over the weekend, President Trump indicated he will sign an executive order today requiring the federal government to pay “most favored nation” prices for prescription drugs. In other words, rather than pay today’s ultra-high prices for many key drugs, the policy would require cutting the US prices to the same low levels paid by many foreign governments. If fully implemented, the policy might help some medical providers and healthcare consumers, but it would likely cut into the revenues of major pharmaceutical firms.

US Beef Industry: Recent price data and food firms’ earnings reports show US beef prices are surging as ranchers reduce their herds in response to drought, lost grazing land, and higher input costs. For example, the latest consumer price index shows the price of ground beef is now up 12.8% year-over-year, standing at a record $5.79 per pound. The rise in beef prices will likely spur consumers to shift more toward cheaper types of protein and potentially undermine President Trump’s political support.

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