The US and China have agreed to reduce tariffs, with the US lowering tariffs on Chinese goods to 30% and China imposing a 10% tariff on US goods. A portion of the US tariffs on China, specifically 20 percentage points, are related to fentanyl, with potential for further reduction.

The agreement is set for 90 days but may extend if negotiations progress positively. Importers face uncertainty in deciding whether to stockpile goods under the current tariffs or anticipate favourable changes.

Market response

The market responded positively, with S&P 500 futures increasing by 3.2%, oil prices rising by 4%, USD/JPY climbing by 280 pips, and a rise in 2-year yields by 11 basis points. These developments suggest improved US, Chinese, and global growth prospects.

The sustainability of these market movements remains to be seen, as they could indicate the underlying economic strength or reveal lingering doubts. Current sentiment suggests a shift towards opening up China for US companies, reflecting an emphasis on economic engagement over trade conflicts.

What we’re seeing here is an agreement between two major economic powers to reduce trade barriers, though the terms remain preliminary. The US has chosen to lower duties on goods coming from China to a level of 30%, while China, in turn, has set a 10% tariff on American imports. It’s worth highlighting that a portion—20 percentage points—of the US’s existing tariffs are tied to opioid-related materials, specifically fentanyl, which allows some room for policy adjustments depending on broader negotiations and compliance.

The temporary nature of this arrangement—currently set for 90 days—requires attention not just to what’s been agreed, but also to what lies ahead. The period can be extended, should talks continue without a breakdown. However, planning around a temporary measure is no easy task. Businesses that rely on imported goods are now weighing whether they should accelerate purchasing before any reversal or possible extension. It’s an uneasy balancing act—one that involves risk either way.

Initial market reaction tells us a lot about where expectations are headed. Equity futures, specifically the S&P 500, pushed higher by 3.2%, while crude oil surged by 4%. Movements in the currency market were equally forceful, with the US dollar gaining 280 points against the yen. Yields on shorter-term US government bonds moved up by 11 basis points, reflecting a rise in short-term growth expectations and possibly a reassessment of interest rate trajectories.

At face value, these shifts reflect optimism—not broad-based or indiscriminate—but focused and conditional optimism grounded in the potential for fewer trade restrictions and smoother economic ties. Still, sharp moves like this also tell us markets may have been heavily positioned for no agreement at all, and what we’ve seen might, at least in part, be a retracement of worst-case pricing.

Powell’s remarks and policy adjustments

Powell’s earlier remarks on inflation moderation have become more relevant in this environment. The moves in front-end yields suggest some expected room for policy adjustment by the Federal Reserve, should trade flows stabilise and prices ease. It’s apparent we’re now tracking a market increasingly sensitive to trade-linked data and less driven by supply chain disruption narratives.

Investors appear more willing to rotate into assets sensitive to global trade, with industrials, commodity-linked equities, and trade-exposed currencies seeing increased activity during the same window. This reaction may prove instructive when monitoring short-dated options or expressions of directional bias through skew. We’ve already seen a mild compression in implied vol, suggesting lowered demand for downside protection in risk-sensitive assets.

In trades where gamma dynamics play a role, it will be essential to monitor how position adjustments unfold as headline sensitivity returns. Futures curves—particularly in oil and key export commodities—are flattening, which often points to better near-term demand expectations. But whether speculative positioning remains comfortable or not may drive any needed volatility dampening in options.

Looking at what this spells for short-term strategy, it’s hard to ignore the better-than-expected synchrony between macro data and trade sentiment. Given both sides are signalling a willingness to reengage economically, it alters how geopolitical risk is thought about—not as headline shocks, but as momentum shifts in global earnings and yield curves.

For structures involving the short-end of rate curves or vol exposure in FX options, short-term calendar spreads and vol skews could move meaningfully. Traders who had positioned for ongoing tensions might find the need to adjust hedges or reduce extremes in bias, particularly if tariff rollbacks are extended or made permanent.

From where we sit, attention now pivots to the pace and tone of follow-up negotiations, rather than metrics that track legacy trade friction. If a reduction in barriers continues, it’s not unreasonable to start pricing in some degree of forward-looking earnings recovery or better shipping margins, both of which were under strain for more than two years.

The change in tone by both sides matters less in sentiment and more in trading flows—where hard data, such as customs receipts, freight bookings, and short-term export orders, will become indicators to watch carefully. Those acting in leveraged products or who are delta-neutral will need to stay nimble, as small episodes of clarity or disruption are now likely to produce sharp but fast-fading moves in implied vol.

There’s less need right now to anticipate a wholesale reversal in policy or regulation. But adapting positioning to reflect a moderation in tension—without betting too far ahead of confirmed outcomes—offers better balance, particularly when liquidity is thinner on the edges of policy events.

Volumes in ETF options and sector variants have already spiked, showing that the appetite for trade direction exposure remains but has rotated in preference towards higher-beta plays and cross-border plays. The degree of pricing in tail protection has dropped modestly—though not entirely abandoned—an indication that market participants haven’t ruled out the prospect of talks stalling once more.

In short, the brief structure and content of the deal, combined with market behaviour and forward pricing, suggest a pattern of responsive strategy rather than speculative aggression. Inflection points like these tend to favour scenario modelling and beta-tuned trades over binaries. Watching positioning adjustments in rate markets and export-sensitive underlyings will clarify the way risk is being interpreted over the next few weeks.

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