Can’t get no (further) relief

Despite further encouraging headlines on tariff reduction, a relief rally in Asian markets trading today has been notable by its absence. This reinforces our view that further gains in equity markets will become harder from here.

Two stories broke on Wednesday afternoon US time that started to flesh on the bones of earlier reports that the White House might consider further tariff reduction. First, the Wall Street Journal reported that the US was considering a substantial reduction in tariffs on imports from China, particularly for goods not to be deemed of strategic importance. Shortly after, the Financial Times reported that the White House was considering easing tariffs on auto producers. Optimism that countries will be able to strike deals to reduce tariffs have helped fuel a rebound in equity markets over the past few days. But the latest positive news on tariffs has failed to drive further gains in equities. The US market dipped into yesterday’s close and Asian markets are down today while European equity markets have also been soft on open.

Why is this? For one, the substance of these reports arguably didn’t add much to previous statements from Trump and US Treasury Secretary Bessent. More importantly, equity markets have already staged a reasonable recovery from the lows reached on April 2^nd. (See Chart 1.) These are no longer markets that have been badly beaten up and are looking for any excuse to rebound. Price-to-earnings ratios are now close to their long-run averages. (See Chart 2.)

A second, related, point is that while the rally in equities over the past few days has been driven by several factors (including President Trump confirming that he is not looking to fire Fed Chair Powell) it has clearly reflected optimism that there will be some rollback in tariffs. In this sense, the latest encouraging news on this front may have already been priced into the market.

Finally, and perhaps most importantly, policymakers on all sides are signaling that it’s a long road ahead. Speaking in Washington yesterday, UK Chancellor Rachel Reeves said that the UK was “in no rush” to do a deal with the US to lower tariffs. In Asia, while the White House has signalled a desire to roll back some tariffs, it has also ruled out a unilateral move. That means a de-escalation would require some kind of deal with Beijing, which could take time –Bessent acknowledged yesterday that talks have yet to begin in earnest. And even if both sides agree to some tariff relief, the WSJ report suggested this could still leave the average US tariff rate on imports from China at a historically high rate of around 50-60%. This might explain why equity markets in China and Hong Kong have suffered larger losses today.

Moreover, the suggestion that tariffs on strategically important sectors will remain even higher serves as a reminder that even if the tariff war eases, the world’s two largest economies are still locked in a deepening super power rivalry. While there now appears to be a pathway to some sort of deal between Washington and Beijing, deeper strains will remain. We argued yesterday that relief rallies will get harder from here - the early evidence of today’s trading shows why.