Written by Samer Hasn, Senior Market Analyst at XS.com
S&P 500 futures are up nearly 2% in early morning trading ahead of the US market open.
The gains in US stocks are likely to follow reassuring signs of a de-escalation in trade tensions, as well as Donald Trump’s decision to backtrack on his plan to fire the Federal Reserve Chairman, which provided relief to the Treasury market and pushed yields lower.
In a notable reversal of the trade escalation, Treasury Secretary Scott Bessen spoke in private meeting about the possibility of de-escalation with China, according to Bloomberg News. Trump also spoke about the possibility of cutting tariffs on China, although he said they would not reach zero.
These words from the White House revive hope about the possibility of negotiations to de-escalate the trade dispute and prevent a global trade war. In recent days, hopes have been fading regarding the possibility of negotiations between the two trading giants, giving the closure of communication channels at the highest levels of decision-making.
In another context, Trump spoke yesterday—contrary to the core of his previous statements—about his lack of intention to fire Federal Reserve Chairman Jerome Powell. This contributed to some respite for the fixed income market, pushing long-term Treasury yields lower, and today’s session also opened significantly lower. Yesterday, the ICE BofAML U.S. Bond Market Option Volatility Estimate (MOVE), which helps measure fear in the Treasury market, recorded its largest daily decline in nearly 40 days, falling 7.94%.
This may indicate the possibility of calm returning to the market after some of the recent turmoil that has undermined the status of government debt instruments as a major safe haven.
As many opinion columnists have noted, Trump tends to retreat when confronted with the severe consequences of his actions. Mounting concerns about a slowdown or even a contraction of the US economy—the International Monetary Fund has cut its growth forecast to 1.8% from 2.7% for the current year—and the sell-off that has rocked Treasury bonds appear to have encouraged Trump and his team to back down.
In addition, Trump’s first 100 days in his second term will end in a week, and he has yet to reach a “big deal” on any major issue—the only deal he can claim credit for is the Gaza ceasefire, which collapsed after its first phase, and perhaps everyone knew it was doomed from the start. The 100 days will also end with the stock market still near bear market territory.
Therefore, I believe Trump will push for deals and perhaps make concessions, whether with China on trade, Russia on the Ukraine war, or Iran in the nuclear negotiations, to avoid exiting the 100-day trial without any significant achievement. This narrative could be an incentive for the stock market to recoup lost gains.
Indeed, the US administration is moving toward making concessions to salvage the chance of a deal that Trump will sign. For example, the United States may move to recognize Russia’s sovereignty over Crimea and the four occupied territories, according to Axios. Furthermore, talks with Iran may not cover issues other than the nuclear program, according to the core of Steve Witkoff’s previous statement.
