Surprise Breakthrough: US-China Talks Spark Market Rally

China and the United States Find Common Ground

After months of escalating rhetoric, mounting tit-for-tat tariffs, and diplomatic gridlock, representatives from the world’s two largest economies finally sat down to talk trade. Approaching the weekend, expectations for common ground between the two rival nations were underwhelming – to say the least. China and the US had each imposed triple-digit tariffs on each other, so high that most investors on Wall Street essentially thought of them as a trade embargo. Meanwhile, representatives from the United States, like Treasury Secretary Scott Bessent, said that the negotiation between the United States and China could take three years and that “everything is on the table,” including the potential to de-list US-traded Chinese ADRs such as e-commerce giants Alibaba (BABA) and JD.com (JD).

However, on Monday, stocks exploded to the upside, with the Nasdaq gaining more than 4% and the S&P 500 gaining ~3%, recouping all the losses (and then some) since President Trump’s April 2^nd “Liberation Day.” Why are investors so happy? Both US and Chinese officials communicated the idea that more progress was made than initially anticipated and that the sides will finalize a pact as soon as possible. Most importantly, each side is slashing tariffs on each other for the next 90 days. The US will cut tariffs on Chinese goods to 30% from 145%, and the Chinese will lower tariffs to 10% from 125%. The cooling of trade relations will provide Wall Street with something it hasn’t had in the past month: certainty. Finally, the US and China released an extremely rare joint statement.

Drug Prices Executive Order

President Donald Trump’s busy weekend did not stop with trade negotiations. Trump shared on his social media platform “Truth Social” that the United States will be instituting a “Most Favored Nation’s Policy” via executive order whereby the United States will pay the same price as the nation that pays the lowest price worldwide. The SPDR S&P Biotech ETF (XBI) and big pharma giants like Merck (MRK) were lower in early trading Monday.  

OpenAI Aims for IPO

Chat-GPT-parent OpenAI made plans over the weekend to re-negotiate its partnership with Microsoft (MSFT) to shift to a public benefit corporation to eventually IPO. OpenAI, which has been under the “non-proifit” umbrella since its founding, has been moving toward a for-profit structure for months, and this news formalizes it. Beyond OpenAI private shareholders, MSFT investors stand to benefit the most from an OpenAI IPO as Micosoft owns a 49% stake in the company.

Geopolitics: Russia/Ukraine, India/Pakistan, Hostage Release

The geopolitical backdrop also provided welcome news for Wall Street. Over the weekend, news broke that Ukranian President Zelensky and Russia’s Putin will meet to negotiate an end to the current conflict. Saturday. India and Pakistan agreed to a ceasefire amid a multi-day skirmish. Meanwhile, the final living Israeli hostage was released by Hamas. Finally, President Trump will make his first international trip of his second presidency when he visits the Middle East on Tuesday.

Bottom Line

An unexpected thaw in US-China trade relations is sending US equity markets soaring this morning.

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This article originally published on Zacks Investment Research (zacks.com).

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