Initial euphoria over the US-China tariff truce has begun to fade, as investors reassess the deeper economic implications of prolonged trade tensions and policy ambiguity. While Monday’s announcement of de-escalation offered a short-term reprieve, markets are now pricing in the complexities that still lie ahead particularly as Q3 approaches with unresolved tariff structures and fading momentum in global demand.
Macro Sentiment:
The broader market narrative is shifting from relief to recalibration. The uncertainty no longer hinges on what tariffs will be imposed, but rather how deeply existing and adjusted tariff levels will weigh on earnings trajectories, trade flows, and economic growth. With political tone softening in Washington, dips in market sentiment may increasingly be viewed as tactical buying opportunities but only for the disciplined and data-driven.
FX & Rates Snapshot:
The dollar lost ground against all G-10 currencies during the Asian session, reversing part of Monday’s gains that were fueled by the trade truce. The Bloomberg Dollar Spot Index slipped 0.2%, with the yen and Swiss franc leading advances on haven demand.
US Treasury yields echoed this pullback. The two-year yield, a bellwether for Fed expectations, eased three basis points after surging 12 bps in New York. Markets recalibrated Fed rate cut expectations, now pricing in 56 basis points of easing by December down from nearly 75 basis points last week. The September FOMC meeting remains the market’s base case for the first rate cut.
Commodities & Cross-Assets:
Gold steadied after Monday’s decline, with haven interest dampened by reduced trade risk but lingering geopolitical undercurrents continue to provide downside protection. Oil markets paused after a three-day rally, as traders rotated attention away from trade dynamics and toward Middle East supply risks.
Strategic Takeaway:
Despite a more conciliatory tone from US officials, investors should not conflate a cooling of rhetoric with resolution. Volatility is likely to resurface as markets digest the structural shifts induced by prolonged tariff regimes. In the near term, selective positioning and tactical hedging remain prudent, particularly in USD denominated assets and rate-sensitive sectors.
Key Metrics at a Glance:
- USD Index (DXY): ↓ 0.2%
- US 2Y Treasury Yield: ↓ 3bps (following +12bps Monday)
- Gold Spot: Little changed
- Brent Crude: Holding gains, risk watch in Middle East
- Fed Rate Cut Odds: 56bps priced by Dec; Sept cut still base case
SARACEN MARKETS INSIGHT:
We continue to monitor potential inflection points in global monetary policy and trade realignment. Our proprietary models remain tilted toward downside risk for USD and moderate disinflationary pressures globally.