US-China trade tensions are influencing markets, with Trump adjusting electronics tariffs. Instead of the 145% rate, they will be set in a different category. The timeline for these tariffs remains uncertain, potentially happening “in a month or so”. Market reactions remain calm, showing optimism as the week begins.
S&P 500 futures are currently up 1%, following a 5.7% increase last week, marking the highest gains since last October. However, questions arise about the sustainability of these rallies. Global economic risks, including potential recession and inflation concerns, persist due to the continued impact of Trump’s tariffs.
Challenges Of Tariff Impacts
These tariffs challenge the recent market perception of temporary uncertainty. The possibility of long-lasting economic disruption is a concern. Monitoring market sentiment is vital as it adapts to these protracted risks.
US futures show positivity, but long-term Treasury yields reveal caution. At present, 30-year yields stand at 4.85%, and 10-year yields at 4.47%, both 50 basis points higher than the previous week’s lows. Headline risks continue to dominate, and markets await further developments in US-China trade relations.
What we’re seeing here is a rather mixed set of signals. On the one hand, equity futures are holding steady, even rising, as we open the week. That sort of movement typically points to a degree of confidence—or perhaps anticipation—on the part of traders expecting further support or simply betting on a continuation of the technical trend upwards. On the other hand, the bond market is sending a different message entirely. Treasury yields have climbed sharply, not because of rising growth expectations, but due to perceived downside risks and lingering inflationary pressure stemming from protectionist manoeuvres.
Trump’s adjustment to electronics tariffs—moving them into a reclassified bracket rather than enforcing the widely discussed 145% level—shouldn’t be misunderstood as a softening. It’s a structural shift with the same restrictive intent, only delivered in a way that leans on regulatory nuance rather than overt escalation. The vagueness around dates only adds another layer of uncertainty. Timing shifts have a way of freezing near-term decision-making in more sensitive corners of the market.
Equity And Bond Market Divergence
Despite the volatile environment, equity upside movement last week was pronounced. A 5.7% gain isn’t a common weekly outcome for the S&P 500, especially one not triggered by central bank policy or earnings season. That should prompt caution. Markets don’t move like that without overstretching somewhere; the fact such a rally got fuelled against the backdrop of trade frictions points towards potential mispricing, particularly if those tariffs become stickier than anticipated.
Long-dated US yields now hovering around 4.85% means that markets are demanding more compensation for risk going forward. That doesn’t square well with equity exuberance. We see in past cycles that when equities and bond yields diverge this markedly, reversion tends to happen. The key question is where it snaps back from: either equities pull lower, or fixed income cools with an economic upside—but we’re not seeing much evidence for the latter.
Volatility is likely to show sharper moves on trade-related headlines. Especially since tariff implementation appears less mechanical and more sporadic. Without a fixed date, traders are left to judge intent rather than outcome. That adds friction. Premiums on short-dated options are likely to increase, skewed towards downside hedges. We’re watching put-call ratios as they slowly climb, and options volume lean heavier in the front-end.
Away from the US, global valuations may suffer secondary effects. Asian suppliers, particularly in semiconductors, are already facing steeper input costs, which over time compress margins. That ripple doesn’t transfer immediately but gradually finds its way into earning revisions. When that happens, broader sentiment can shift noticeably.
We also can’t ignore positioning. Sentiment was leaning optimistic as the week began, but we know how fleeting that optimism can be when grounded solely in news-flow. If yields remain elevated, leveraged longs will reassess. That means tactically reducing exposures or rotating into rate-sensitive sectors. There’s no real appetite right now for long-duration bets unless inflation expectations stabilise. And with energy prices starting to grind higher again, we’re not holding our breath there.
What we are doing is watching open interest build-up in futures. The way traders are behaving suggests they’re keeping protection layered without entirely backing out of risk. That makes sense, especially with macro data coming in sporadically and supply chains once again in focus. Trading desks are looking more at relative value than directional bets; momentum won’t be holding up on sentiment alone.
Policy expectations aren’t helping either. With the Fed remaining data-dependent, and now with fresh variables imported via trade policy, the rate path gets murkier. It’s not an ideal time to overcommit. Vol-growing environments benefit nimble positioning. Derivatives provide flexibility when allocated in moderation and in alignment with volatility triggers.
Monitor open interest. Stay close to cross-asset correlations. And know that tariff timing, even if hinted to occur “in a month or so,” impacts risk allocation today, not when signed. That’s where the mispricing begins.
