The challenges of China Post Geneva
The 90-day truce with the United States helps reduce short-term risk to Chinese growth. This has resulted in a rebound in Chinese stock indices and an appreciation of the yuan against the U.S. dollar, reaching a parity of 7.20, a high since November 2024.
Before the tariff escalation between the two countries, investor concerns were mainly focused on domestic factors such as the real estate crisis, weak private consumption, and the job market. This negative sentiment towards the growth prospects of the Chinese economy had penalized the stock markets, put pressure on the Chinese currency, and resulted in long-term interest rates reaching historically low levels. We believe that fundamentals will continue to be the main catalyst for Chinese financial markets.
The economic indicators released for April show that the impact of tariffs has been limited. Economic momentum remains intact, suggesting a rebound in activity in May. However, China must strengthen its private consumption to rebalance its economic model. Despite efforts by authorities to stimulate it, private consumption remains weak.
The negative inflation at-0.1% for March and April also reflects this. Real estate remains the main drag on activity, but the tariff escalation has not hindered progress in stabilizing the sector. We believe that authorities will strengthen their efforts towards the technology and innovation sectors to revitalize the job market, which is crucial to restore consumer confidence. The PBOC has lowered its benchmark interest rate and mandatory reserve rate for major banks to support activity. Negative inflation increases real interest rates. Chinese banks have reduced their 5-year loan rates, which serve as a benchmark for mortgage loans, by 10 basis points to 3.50% to revitalize real estate sales.
Beyond economic and financial considerations, the Geneva agreement has affirmed China's position as an equal power to the United States.
The U.S. dollar does not benefit from the general “Risk-on” sentiment
Following the trade agreement between China and the U.S., which reduced reciprocal tariffs to 10% for 90 days, most risky assets (credit, emerging market debt, equities, etc.) have rebounded strongly, returning to their levels prior to "Liberation Day."
Meanwhile, volatility has decreased, and expectations for a rate cut from the Fed have been revised, now limited to-50 basis points by the end of December 2025, suggesting a lower risk of recession in the U.S. However, the U.S. dollar has not taken advantage of this "risk-on" momentum and has not regained the high levels it had before April 2. While its status as the world's primary reserve currency remains intact, its position as a "safe haven" is beginning to be questioned. Uncertainty surrounding tariffs persists and poses a risk to U.S. growth. The average effective tariff rate in the U.S. could exceed 10%, which is 4 times the level prevailing at the beginning of the year.
Economic activity data in the U.S. remains solid, but the bulk of the impact from the new tariff measures is yet to come, affecting both inflation and growth. Additionally, U.S. fiscal policy has raised new concerns, with a deficit of nearly 7% of GDP that could worsen further if the new tax cuts requested by the Donald Trump administration are passed.
The rise in long-term interest rates (with the 30-year U.S. Treasury yield above 5%) and the concurrent weakness of the U.S. dollar illustrate this distrust regarding U.S. debt, further compounded by the downgrade of the sovereign rating to Aa1 by Moody’s.
Hedging flows for U.S. assets and export receipts, which have been very weak in recent years due to positive carry and the continuous appreciation of the U.S. dollar, could increase significantly.
A renewed confidence in the U.S. economy seems necessary to reverse the trend and restore the attractiveness of the carry trade in USD, especially against the yen, yuan, and euro.
Excess on equities but positionning is still supportive
Two catalysts explain the recent rally on stocks:
1- the worst-case scenario leading to a global trade freeze, a major cyclical slowdown, an earnings correction and a sustained rise in volatility was avoided, causing a rebound in risk appetite;
2- a positive multiplier effect promoted by a very cautious positioning and sentiment on risky assets caused a massive movement of short positions repurchase rather than new long positions.
At the very short-term, this rally could continue somewhat due to flows, positioning and chartist analysis. Faced with rising markets and moderating volatility, some market players such as systematic managers are forced to make purchases, fueling a self-sustaining rise. Moreover, while many analysts have revised down their earnings outlook, they did it very cautiously due to a lack of visibility, particularly in the United States and Japan. This leads to short-term valuations remaining attractive in some areas, or at least not prohibitive, despite the recent rebound.
At the medium-term, it seems unlikely that equities will sustainably surpass the year's highs. Trade and financial conditions have deteriorated since Donald Trump's election, and this should logically be reflected into higher risk premiums and lower benefits. Financing rates have not eased and could increase more due to fiscal tensions, and 15% average tariffs as they are today are far from negligible —Americans remain the leading trading partners of major economies. Moreover, quickly negotiating alternative free trade agreements outside the United States, as the United Kingdom and India have done recently, should remain the exception rather than the rule, at least in the near-term. In this context, we prefer not to reintroduce equity risk into Multi Asset portfolios at the current levels due to a risk/reward deemed too low.
