Market Report:
🇨🇳 Tensions between China and the US are rising again despite the agreement signed last week. China has accused the U.S. of undermining the preliminary trade agreement between the two countries after the U.S. issued an industry warning against using Chinese chips, singling out Huawei. China has “demanded” that the Trump administration “correct its mistakes,” calling the U.S. Commerce Department’s guidance “discriminatory” and “market distorting.”
⚠️ The U.S. Commerce Department’s Bureau of Industry and Security issued an alert warning of “the risks of using PRC advanced-computing ICs, including specific Huawei Ascend chips,” claiming they were likely developed or produced in violation of U.S. export controls. China argues the U.S. actions “seriously damage the legitimate rights and interests of Chinese companies” and “seriously threaten the security and stability of the global semiconductor supply chain and ultimately undermine the competitiveness of the U.S. industry, and the result can only be to shoot itself in the foot.”
📉 According to CNBC, Chinese exporters are exploiting U.S. tariffs by under-invoicing and mislabeling shipments, avoiding full payment. This is done through illegal activities, where shipments are routed through shell companies that default on tariffs. Once the customs bond is used up, these shell companies reopen under a new entity, making it difficult for authorities to recover unpaid duties. This practice is an “open secret” in the industry, and is increasingly discussed among U.S. firms sourcing from China to avoid Trump’s tariffs. Estimates suggest this evasion amounted to $110-$130 billion in 2023, dwarfing the $92.3 billion total duties collected by U.S. Customs.
💰 Meanwhile, Beijing seeks to boost the economy amid the ongoing trade war. China has cut benchmark lending rates for the first time since October, with the one-year loan prime rate (LPR) lowered by 10 basis points to 3.0% and the five-year LPR reduced by the same margin to 3.5%. The rate cuts are aimed at stimulating consumption and loan growth as China’s economy softens, while still protecting commercial lenders’ shrinking profit margins. Major state-owned banks in China have also lowered deposit interest rates by 5-25 basis points for some tenors. Commercial banks’ net interest margins dropped to a record low of 1.43% in the first quarter, and are expected to fall further by 10-15 basis points this year as banks compete to offer cheap loans.
📈 Markets appear to be stabilising in the US following Moody’s credit downgrade. Investors initially reacted negatively to Moody’s downgrade of the U.S. credit rating from ‘Aaa’ to ‘Aa1’, but then proceeded to buy bonds, driving yields lower. The downgrade triggered a jump in long-term Treasury yields, with the 30-year bond yield reaching nearly 5% and the 10-year note yield climbing to 4.52%. Moody’s warned about the lack of fiscal restraint in the U.S., stating that successive administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits.
🛡️ But Billionaire Ray Dalio, founder of Bridgewater Associates, warned that Moody’s downgrade of the U.S. sovereign credit rating understates the real threat to U.S. Treasurys. Dalio said credit ratings don’t account for the risk of the federal government simply printing money to pay its debt, which would cause losses for bond holders due to the decreased value of the money. He stated that “for those who care about the value of their money, the risks for U.S. government debt are greater than the rating agencies are conveying.”
🇪🇺 In Europe, The U.K. and European Union have announced a landmark deal to reset their relations after Britain’s acrimonious exit from the bloc in 2020. The deal covers a range of matters including security, energy, trade, travel, and fisheries, marking a “new chapter” in the U.K.-EU relationship. The deal will make it easier for British food and drink to be imported and exported, reducing red tape and removing some routine checks on animal and plant products. In the area of security and defence, the U.K. and EU agreed on a new partnership that will allow the U.K. defence industry to participate in the EU’s proposed £150 billion “Security Action for Europe” defence fund. The deal extends fishing rights for EU trawlers in U.K. waters until 2038, a key issue in the negotiations.
🎣 However, some issues remain unresolved, including a “youth experience scheme” to enable young people to live and work across the continent. Prime Minister Keir Starmer is in a difficult position, needing to balance the deal with maintaining the government’s “red lines” on issues like the single market and freedom of movement.
💬 Nigel Farage, leader of nationalist party Reforme UK, stated that the 12-year extension allowing European boats access to British waters “will be the end of the fishing industry.” This sentiment reflects deep concern within Reform UK that the agreement undermines the sovereignty and economic viability of the UK’s fishing sector. Farage has also expressed reservations about the proposed youth mobility scheme suggesting that this could be the tip of the iceberg for new immigration chaos.
Geopolitics:
🤝 President Trump has been pushing for U.S. allies to pay more for hosting American troops, and is now bundling these defence cost-sharing negotiations with trade and tariff talks in a “one-stop shopping” approach. South Korea, which hosts around 28,500 U.S. troops, is one of the countries Trump is targeting with this strategy. However, South Korean officials have said defence payments are off the table. But transactional approach may not work in the U.S.’s favor, as it could damage American credibility and be seen as the U.S. acting more like a “landlord seeking rent” than a reliable ally. South Korea already spends a relatively high percentage of its GDP on defence, over 2.6% in 2024, and has agreed to increase its contribution for hosting U.S. troops by 8.3% in 2026. Bundling these defence cost-sharing agreements with trade negotiations could jeopardize the latest 2024 deal between the U.S. and South Korea, which covers the period of 2026-2030.
📞 Russian President Vladimir Putin and U.S. President Donald Trump discussed “impressive” prospects for ties between their two countries in a phone call yesterday. Putin said Russia would work with Ukraine on a memorandum about a future peace accord, while Trump said Russia and Ukraine would immediately start negotiations toward a ceasefire. Trump described Russia as one of America’s “most important partners in trade and economic matters” once the Ukrainian conflict is resolved. Trump mentioned a Senate bill on new sanctions, but said he is not a supporter of sanctions and instead favors reaching agreements.
💱 According to a Russian government source cited by Reuters, the Russian government is concerned that a slide in the ruble back to 100 against the dollar could spiral out of control, even though the economy could cope with that level. The ruble has surged about 40% against the dollar to around 80 this year, which analysts see as overvalued. Triggers for a slide could include failed Ukraine peace talks, a possible interest rate cut, and lower oil prices. The government source said there is broad interest in a weaker ruble, perhaps around 100 to the dollar, as long as the decline is steady and doesn’t go much further. A negative outcome in Russia-Ukraine talks or new Western sanctions could trigger heavy buying of foreign currency and a sharp ruble slide. A ruble rate as weak as 110-120 to the dollar, as it would drive up inflation.
Market View:
📊 Nothing seems to impede the progress of the markets, and the distortion caused by Moody’s appears to be fading. The Mini S&P 500 futures are approaching the 6,000-point mark and will likely reach it in the coming hours, currently trading at 5,962 points. The Nasdaq 100 futures reached 21,560 points during yesterday’s session but have slightly retreated to the current level of 21,425 points.
💵 The Dollar Index (DXY) attempted to conquer the 100.50-point level yesterday but failed, retreating again to the current 100.20 points. This decline has helped pairs like EUR/USD stay afloat above 1.1250, while GBP/USD, which reached 1.34 yesterday, quickly pulled back but now seems to be attempting another rally, eyeing 1.3375.
📈 Optimism prevails in Europe as well, with DAX 40 futures once again reaching another all-time high yesterday, surpassing 24,130 points. Eurostoxx 50 futures are also advancing positively, nearing the 5,500-point zone.
🛢️ Crude oil remains volatile, with Brent crude approaching $66 per barrel yesterday, but currently retreating to $65.25.
🥇 Gold futures started the week strong but have been retreating since yesterday, dropping from the levels recorded yesterday at $3,250 to the current $3,212.50.
₿ Bitcoin continues to show strength, having approached $107,000 twice since yesterday, with slight pullbacks currently bringing it to $105,850.
