A pause in hostilities sparks global relief rally

Markets across the globe breathed a sigh of relief after signals emerged from Washington suggesting a softening in U.S. trade policy towards China. Investors welcomed the more conciliatory tone from President Trump and rising hopes for a de-escalation in tariff tensions, igniting a broad-based rally in equities and easing pressure on bond markets. However, behind the bounce lies a more fragile economic reality, particularly in Europe and the UK, where the private sector is faltering under the weight of ongoing trade uncertainty.

Trump eases rhetoric on China: A shift in tone?

President Trump indicated that he is prepared to be “very nice” to China in upcoming trade talks, a noticeable shift from his combative stance earlier this month. While the 145% tariff on Chinese goods remains intact for now, Trump suggested the rate could “come down substantially” if a deal is reached. Notably, he downplayed earlier threats to “play hardball” and chose not to raise contentious issues such as the origin of COVID-19 during talks. The shift, seen by some as driven by political and market pressure, helped restore calm after weeks of rising geopolitical risk.

China, while yet to issue an official response, has started mobilizing its trade and diplomatic apparatus, signaling readiness to negotiate if mutual respect is restored. On social media, Chinese reactions ranged from cautious optimism to mocking skepticism. Markets responded positively: the offshore yuan strengthened, and Hong Kong-listed Chinese shares rallied on hopes of renewed dialogue.

Fed independence intact: Another source of relief

Adding to the optimism, Trump publicly confirmed he has no intention to dismiss Federal Reserve Chair Jerome Powell, tamping down concerns about central bank independence. His comments reversed earlier threats and helped lift risk sentiment. The 10-year Treasury yield dropped to 4.35%, and the S&P 500 futures surged 2%, supported by the broader narrative of policy normalization and de-escalation.

UK private sector contracts sharply: Trade fallout in focus

Despite the market rally, macroeconomic data from the UK tells a more troubling story. The UK private sector experienced its most significant contraction since 2022, with the composite PMI falling to 48.2, well below the expansion threshold of 50. Both manufacturing and services came under pressure, with firms reporting a dramatic drop in overseas orders, citing U.S. tariff uncertainty as a key factor. The impact of new payroll taxes and minimum wage increases in April also weighed on sentiment and employment.

Businesses expressed growing fears of a recession, both domestically and globally, with many delaying major spending decisions amid the evolving trade backdrop. This weakening demand, combined with rising costs, pushed inflationary pressures higher – a concerning sign for monetary policymakers.

Eurozone growth stalls: Germany and France lead the decline

Similar themes played out in the euro area. The eurozone composite PMI edged just above contraction territory at 50.1, dragged down by unexpected weakness in Germany and France. Both economies saw a slump in services, an area previously expected to cushion the region against industrial slowdown. As a result, confidence among service providers sank to its lowest level in nearly five years.

Despite optimism surrounding increased public investment in infrastructure and defense, analysts now fear that Trump’s tariffs could derail Europe’s fragile recovery. The ECB’s recent rate cuts have yet to produce meaningful traction, and markets are now pricing in further reductions to prevent inflation from dipping below the 2% target.

Market reaction: A risk-on rebound, but sustainability in question

Risk assets surged across the board: the Stoxx Europe 600 rose 1.9%, Nasdaq 100 futures jumped 2.4%, and Bitcoin reclaimed $90,000. Commodities were mixed—Brent crude advanced while gold retreated as safe-haven demand faded.

Currencies saw moderate shifts, with the dollar stabilizing and the offshore yuan gaining ground. The euro and pound weakened slightly amid domestic economic concerns. Bond yields declined in the U.S. and UK, while edging higher in Germany as investors repositioned for potential policy shifts.

Calm, not confidence

While markets are embracing the short-term reprieve provided by Trump’s more measured rhetoric, underlying macroeconomic data continue to flash warning signals. The sharp deterioration in business activity across the UK and euro area highlights the toll that trade uncertainty and inflationary pressures are taking on the global economy. Until rhetoric translates into concrete action—particularly in the form of rolled-back tariffs—volatility may remain the norm.

Key risks to monitor:

• Beijing’s formal response to Trump’s new tone
• Any developments from upcoming IMF/World Bank meetings
• Eurozone and UK inflation data in light of slowing growth
• Progress (or lack thereof) in U.S.-China trade negotiations

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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