Week ended May 30, 2025: Trade war softens

WHAT CAUGHT MY EYE LAST WEEK

The holiday shortened week has been reasonably good so far for risk investors, with the trade war / tariffs continuing to zig-zag, Nvidia (#NVDA) serving up strong results and favourable guidance, and the 2025 Bitcoin Conference in Las Vegas illustrating the widening appeal of cryptocurrencies.  The week also brought a weak 40y bond auction in Japan, with yields under pressure there, and the release of the minutes from the last FOMC meeting on May 6-7 which you can find on the Fed website here (with no real surprises).

Trade war / tariffs

No sooner had Mr Trump threatened the EU with 50% tariffs last Friday – slated to begin on June 1 – than he reversed course on Monday, saying that the US and the EU were now looking to strike a bilateral trade deal before June 9.  Of course, it was painted by the Administration as the EU grovelling to make a deal with the US, but 50% tariffs on the EU would certainly be matched by EU tariffs on US goods, and these sorts of tariffs do no one any favours.  I would have thought that Mr Trump and his rather poor trade team might have gotten the message by now, with stock markets gyrating all over the place and bonds generally exhibiting weakness.  Right on cue, global stock markets tanked last Friday on the announcement of imminent 50% tariffs, and then bounced back in a massive relief rally when markets reopened on Tuesday morning, following the announcement on Monday that the tariffs would be deferred until June 9 as the two parties try to reach a deal in the interim.  Robert Armstrong has coined the term “TACO” in his Unhedged column meaning “Trump Always Chickens Out”.  It was hilarious seeing Mr Trump try to “bob & weave” on this acronym when asked by a reporter mid-week in a 40 second clip you can watch on YouTube here.  As an investor, you simply have to get used to this sort of the “on again, off again” approach of Mr Trump – first the trade war escalates with a target country, and then it is deferred or watered down.  This happens time and time again, so investors – including this one – have to acclimate to this rhythm.

If this capitulation wasn’t enough, the US Court of International Trade – a federal court based in New York – ruled late Wednesday that the Trump Administration did not have the authority to impose blanket tariffs under a 1977 act that otherwise requires a national emergency for the president to invoke tariffs.  In essence, the law states that tariffs and trade policy are for the legislative branch (i.e. Congress), not the executive branch (the president).  By Thursday evening, an appeals court had overturned the decision, so the “is it or isn’t it” appears to be heading to the Supreme Court, which will be very interesting to see unfold.  Mr Trump has used the reasoning that the growing US trade deficit is a “national emergency” and hence merits presidential action without the approval of Congress, which – as an aside – his party controls.  If the trade deficit is a national emergency, then the budget deficit and ongoing 2025-26 budget discussions must be an imminent nuclear holocaust waiting to happen!  In any event, investors first cheered the news of the tariffs being deemed illegal, with global equities rising in the morning session on Thursday, but then faded into the afternoon simply because of the uncertainty ahead.  It is a familiar theme.  The Trump team’s tactics will be to point fingers, moan about unelected officials in the judiciary being political, and continue to rattle the tariff cage in spite of his trade policies being a horrific mistake as far as the US (and global) economy.  Whatever the outcome, the legality of tariffs is now thrown into question although they will remain in place for now.

As markets absorbed this news and retrenched, a headline this morning in #Bloomberg said “Bessent Says US-China Talks ‘Stalled,’ Pushes for Trump-Xi Call”.  Given the back-and-forth with China, one of the US trade counterparties with the largest trade deficit, this has sewn more uncertainty as we move to the last trading day of the week (and of the month). 

The bond market also settled on the news this week, not surprising in that watering down tariffs both reduces uncertainty and provides relief from tariff-induced inflationary pressures.  The bond market is arguably more focused (correctly) on the US budget discussion, which will eventually move front & centre as I discuss further below.

NVDA earnings

You can find NVDA’s stellar 1Q26 earnings release here.   The company beat on top-line revenues, which were up 12% QoQ and 69% YoY.  Wow!!  Earnings fell slightly short of consensus earnings expectations, ($0.81/sh vs $0.85/sh), but were still up (GAPP) 27% YoY.  Most importantly, the company provided better guidance than expected even with restrictions on sales of advanced AI chips to China.  CEO Jensen Huang more or less slammed the Trump Administration’s restrictions on AI chip sales to China, saying it was opening the door to the country developing its own AI chips faster.  The net result is that investors loved NVDA’s results, with the shares rallying 3.2% on Thursday, which also pulled other chip company shares higher.  Although the company’s forward P/E ratio has jumped to 32.3x – no longer cheap – it is remarkable how much more fairly NVDA appears to be priced compared to meme-stock TSLA (169.5x forward P/E, ha ha ha).

Crypto conference in Las Vegas

Las Vegas (how appropriate) was the site this week of the 2025 Bitcoin conference, a three-day conference featuring a host of Bitcoin/ crypto bros, as well as VP JD Vance, and Mr Trump’s sons Donald Jr and Eric.  The conference got plenty of attention, and provided proof certain that this administration is strongly backing the evolution of the cryptocurrency market in the U.S.  Cryptos aren’t my thing, but the conference seemed well attended with all of the requisite crypto advocates, and seems to have been a resounding success.  #BTC has been on a tear, but it was down this week during the conference.  It’s of course hard to read anything into this, because how BTC is priced remains a complete mystery to me.

Other news that mattered 

The FOMC minutes from the early May meeting were released, and there was plenty of attention on the poor 40y government bond auction in Japan early this week.  The reality is that many developed government bond markets are loosely tethered to yields in the US Treasury bond market, so it was not surprising to see the JGB market under pressure.  It is a stark reminder that there will be gobs of attention focused on the 2025-26 US budget discussions, as the House-approved budget moves to the Senate.  In its current form, it is clearly getting a “nah” vote from bond investors, so it will be interesting to see how these discussions evolve in the coming weeks.  I think that Ray Dalio’s idea of trying to reduce the US deficit to 3% of GDP (as opposed to its current 7.5%) through a combination of higher taxes, lower government expenditures and lower interest costs (which are in turn related to the “reliability” of the budget) has merit, although whether or not Congress and the Trump Administration have the spine to move in this direction remains to be seen.  You can see Mr Dalio’s interview with Andrew Sorkin (CNBC) from January 2025 here (just over 1 minute).  Certainly, I would think that the bond market would be able to jolt US politicians out of their complacency, or so let’s hope.

MARKETS LAST WEEK

The holiday-shortened (US and UK) week started with a massive relief rally on Tuesday, a reaction to the one-week deferral of 50% tariffs on the EU which were to be imposed by the Trump Administration starting June 1.  The rest of the week was rather uneventful, with the latest news on trade / tariffs pushing the market one way or the other, although by now investors are becoming accustomed to Mr Trump backing off of his blustery threats.  

Consumer confidence in the US did not worsen in May as had been feared (here), and headline PCE and core PCE price increases for April came in at 2.1% and 2.5% (both YoY, here), respectively, both representing an improvement over March.  The fact that inflation seems to be trending in the right direction in spite of the “liberation day” tariffs brought some relief to the US Treasury bond market, with yields improving 10bps to 12bps across the curve on the week.  Global equity markets were also better on the week, especially in developed markets like the US, Japan (best performer), UK and Europe.

Taking their cue from a more settled UST market and better sentiment in US stocks, corporate credit yields and spreads both marched tighter last week, pushing the BBB and high yield indices into positive territory as far as total returns YtD.  Both gold and Bitcoin lost ground on the week, with the US Dollar ending slightly stronger to close out the month.

YtD, European (+8.1%), UK (+7.3%) and emerging markets (+7.6%) stocks have been the best performers.  The S&P 500 is positive YtD, but only by 0.5%, with the other US stock indices tracked by EMC all in the red for the year.  The best performing asset by far YtD has been gold, up a solid 26.2% YtD.  Bond indices have all settled into positive territory albeit barely, with the exception of the UST total return 20+ year index which remains slightly negative YtD, illustrating that duration so far has not been the place to be.

The tables below provide performance for the week, month, YtD and prior years.

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