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The word from President Trump on Friday was that an 80% tariff rate for China seems right, but that it is up to Scott B. Well, Scott B. (i.e., Treasury Secretary Bessent) came up with a plan, along with Chinese counterpart He Lifeng in Switzerland over the weekend, that will cut the tariff rate on imported Chinese goods to the U.S. from 145% to 30% and imported U.S. goods to China from 125% to 10% for a 90-day period.
The market is loving this much better than expected news! The S&P 500 futures are up 170 points and are trading 3.0% above fair value, the Nasdaq 100 futures are up 781 points and are trading 3.9% above fair value, and the Dow Jones Industrial Average futures are up 1,046 points and are trading 2.5% above fair value.
There isn't any hangup at the moment about this not being a permanent change. Market participants simply care that it represents a major de-escalation and a move to a tariff area that is at least workable for U.S. businesses and the global trade order.
There is a presumption, too, that this de-escalation will lower the probability of a recession, which is fostering some sense of relief on the earnings estimate front and some unwinding of safe-haven trades. The 2-yr note yield is up 12 basis points to 4.00%, as the fed funds futures market is now pricing in the next rate cut at the September meeting (versus July before the weekend meeting), and the 10-yr note yield is up eight basis points to 4.46%.
Separately, gold futures are down 3.3% to $3,232.20/troy oz; the U.S. Dollar Index is up 1.3% to 101.67, and the CBOE Volatility Index is down 9.4% to 19.84.
There is a risk-on mentality permeating today's marketplace. Material price gains, exacerbated by short-covering activity and a fear of missing out on further gains, are being registered across industry groups and sectors in pre-market trading.
The pharmaceutical stocks, though, are a notable exception. They are mostly lower following the news that President Trump will sign an executive order that will require the government to adopt a "most favored nation" pricing model for prescription drugs. In brief, the U.S. "will pay the same price as the nation that pays the lowest price anywhere in the world."
In other (geo)political news, House committees are expected to begin the markup process of the large reconciliation bill on Tuesday, Treasury Secretary Bessent has called on Congress to raise the debt ceiling by mid-July, India and Pakistan have agreed to a ceasefire, and Ukrainian President Zelensky has challenged Russian President Putin to meet him in Turkey on Thursday for ceasefire talks, according to The Wall Street Journal.
With the opening move, the S&P 500 will blast off through its 200-day moving average (5,749). That will be construed as a positive technical development if the market can retain that posture on a closing basis.
