​Global Markets Surge as Trump Pauses Tariffs, but China Escalation Clouds Outlook​

Global financial markets breathed a collective sigh of relief this week as former U.S. President Donald Trump abruptly paused the escalation of tariffs against countries that have not retaliated, triggering a historic equity rally. While the move was framed as a negotiation tactic, it revealed deep vulnerabilities in both policy and market sentiment. The rally may offer a sugar high, but beneath the euphoria, economic and geopolitical fault lines remain dangerously exposed.

The Market Reaction: Relief, Not Resolution

On Wednesday, Trump stunned investors by announcing a 90-day suspension of additional tariffs on “friendly” nations — a move that catalysed a breathtaking global equity rebound. The S&P 500 surged 9.5%, its best single-day performance since the 2008 financial crisis, adding approximately $4.3 trillion in market value. European indices followed suit: Germany’s DAX climbed 8.3%, the Stoxx Europe 600 rose 5.5%, and the UK’s FTSE 100 advanced 6.1%. The euphoria rippled into Asia, with Japan’s Topix and Taiwan’s Taiex jumping 8% and 9.3% respectively.

Bond markets also reacted with relief. After a bout of aggressive selling, U.S. Treasuries stabilised — the 10-year yield retreated to 4.35% from an intraday high of 4.51%. The shift in sentiment was so significant that Goldman Sachs reversed its forecast of an imminent U.S. recession within hours of the announcement.

The Strategic Pivot: Capitulation or Calculation?

This climbdown came after severe volatility in risk assets and mounting pressure from both Wall Street and foreign governments. Over $6 trillion had been wiped off global equities in the preceding week, oil prices had plunged to COVID-era lows, and US bonds — the cornerstone of global financial liquidity — were facing liquidity concerns.

Trump’s sudden pivot, while presented as strategic flexibility, reads more like tactical capitulation in response to financial instability. His messaging made it clear that China was still being targeted, with tariffs raised from 104% to 125% on Chinese imports. China responded immediately with retaliatory tariffs totalling over 100%, including an 84% increase announced Thursday.

This bifurcated approach — de-escalating with allies while intensifying pressure on China — sets the stage for a fragmented trade environment, complicating global supply chains and investment flows.

MY TAKE: Markets Are Celebrating Too Soon

While the market rally was undeniably historic, I would caution against interpreting it as a sign of fundamental economic healing. Instead, it’s more akin to a volatility-driven relief rally, priced off short-term sentiment rather than long-term fundamentals. Here’s why:

1. Tariffs Remain a Drag on Growth: Even with the pause, the 10% blanket levy on most imports remains in effect. For China, the effective tariff rate is now 125%. These frictions will continue to weigh on global trade volumes, disrupt cross-border investment, and drive up input costs — all inflationary overhangs.

2. Inflation Risks Persist: Citigroup has rightly pointed out that this pause does not mitigate the inflationary consequences of existing tariffs. Higher import prices feed directly into core inflation metrics — a challenge for central banks already caught between policy credibility and recessionary risks.

3. Geopolitical Risk Premium: The escalating standoff with China is not just economic, but strategic. As the world’s two largest economies dig deeper into confrontation, markets will demand a higher risk premium — especially in sectors exposed to global supply chains, such as semiconductors, manufacturing, and industrials.

4. Policy Uncertainty as a Market Variable: Trump’s decision appeared impulsive, with key trade negotiators unaware of the announcement as it was made. Markets thrive on predictability — this unpredictability adds volatility and undermines confidence in policy direction.

MY INVESTMENT OUTLOOK: Stay Nimble, Stay Defensive

In the near term, I expect continued volatility as markets digest the implications of these mixed signals. While risk-on sentiment may dominate headlines, savvy investors should be positioning defensively. I favour:

• High-quality dividend-paying equities, particularly in less tariff-sensitive sectors (utilities, healthcare).

• Short-duration fixed income, to manage duration risk amid uncertain rate policy.

• Selective exposure to EM Asia, excluding China, where trade relationships with the U.S. may improve amid bilateral negotiations.

• Hedging through options or volatility-linked instruments as a cushion against potential escalation.

Conclusion

Trump’s tariff truce is not a sign of resolution, but of economic fragility. The dramatic rally that followed underscores how sensitive today’s markets are to policy risk. As an investor — and as someone deeply interested in how macroeconomic policy shapes capital markets — I see this episode as a reminder: geopolitical theatre may drive headlines, but it's long-term fundamentals and strategic consistency that shape outcomes.

Let’s not confuse relief with recovery.