Wall Streets Tariff-driven Rebound

A flimsy but welcome accord between Washington and Beijing has unleashed one of the sharpest bursts of optimism on Wall Street in years. After presidents Biden and Xi agreed to suspend further tariff increases for 90 days, the S&P 500 has sprinted 4 per cent this week—erasing the index’s losses for 2025 in a matter of sessions. The technology-heavy Nasdaq Composite has fared even better, vaulting almost 30 per cent from its early-April nadir. Money has poured out of safe havens too: Treasury prices have fallen, pushing the 10-year yield up to 4.5 per cent, while the dollar initially firmed before surrendering most of its gains.

Few large investors were prepared. Weeks of grim economic indicators and political brinkmanship had convinced many that the United States was sliding towards a slowdown. Portfolio managers bulked up on Treasuries, wagered against the dollar and trimmed their US equity exposure. “The market found a lot of people caught offside,” said Robert Tipp, head of global bonds at PGIM Fixed Income. “Even though plenty of tariffs remain by modern standards, the possibility of a de-escalation forced portfolio managers to cover positions in a hurry.”

That scramble has amplified the upswing. Trend-following hedge funds, which ride momentum, had built hefty shorts in equities and longs in bonds; as prices reversed they were squeezed out, adding fuel to the rally. “Essentially every thematic macro trade of the past few months is now running in reverse,” noted Charlie McElligott, strategist at Nomura.

A Bank of America fund-manager survey, completed just before the truce, captured the prevailing gloom. Respondents registered their most negative view of US shares in two years and their biggest bearish tilt on the dollar since 2006. Commodity Futures Trading Commission positioning data paint the same picture: asset managers held their largest bullish bet on the euro since September 2024 and their biggest ever long in 10-year Treasury futures, a wager that yields would tumble as growth stalled.

The suddenness of the policy U-turn has therefore delivered a nasty jolt. “There are some institutional investors who had de-risked pretty aggressively, and a lot of cash was sitting on the sidelines,” said Gargi Chaudhuri, head of investment strategy for the Americas at BlackRock. “When good news finally arrived, they were forced to chase the market higher.”

Retail investors, often derided as late entrants, appear to have played this episode adroitly. Deutsche Bank flow trackers show individuals buying throughout April’s slump while professional money stayed cautious. The bank notes that most of the S&P 500’s advance over the past month has occurred during normal New York trading hours, when retail activity peaks, whereas overnight futures sessions favoured by institutions produced meagre gains. It is a rare instance of Main Street front-running Wall Street.

As prices roar back, fear has ebbed. The CBOE Vix index, Wall Street’s “fear gauge”, has slipped to levels last seen before the White House’s early-April “liberation day” tariff announcement sent shockwaves through global markets. Implied volatility in the euro-dollar pair, tracked by CME Group options data, has likewise fallen to a two-month low. Position-squaring rather than conviction buying may explain part of the calm, but for now tranquillity reigns.

Not everyone is ready to declare the all-clear. Andrew Pease, chief investment strategist at Russell Investments, argues that markets are overlooking the harm already inflicted on corporate confidence and capital spending. “We should not forget the policy chaos that has battered sentiment on both sides of the Pacific,” he said. Tariffs still sit at what economists call “modern-era highs”, and many deadlines could easily slip if negotiations stall.

Currency specialists are equally wary. Athanasios Vamvakidis, head of G10 FX strategy at Bank of America, believes the greenback’s respite will prove brief. “For the dollar to weaken again we need US data to soften, and we think it will,” he said, warning that residual tariffs may deliver a stagflationary mix of slower growth and stickier prices. Dominic Schnider, who oversees foreign-exchange and commodities at UBS Global Wealth Management, echoed the caution: “Investors have yet to grasp how much economic scarring the trade war has already caused.”

History offers plenty of examples of tariff truces that crumble once political pressure eases. Both Washington and Beijing face domestic audiences sceptical of compromise, and the 90-day ceasefire may simply postpone rather than resolve the underlying clash over technology and national security. In that sense, the current market surge resembles a relief rally rather than the first leg of a lasting bull-run.

Even so, short-term momentum is powerful. Cash that fled to the sidelines now chases performance; balance-fund rebalancing flows favour equities at the expense of bonds; and systematic strategies forced to rebuild risk allocations can keep demand humming into early summer. Should macro data surprise on the upside, especially US payrolls or consumption figures, the squeeze could persist.

For professional investors the episode underscores a perennial lesson: when consensus grows one-sided, policy surprises can deliver brutal reversals. Large speculative longs in safe assets and shorts in riskier ones create tinder for a rapid turn-round. The latest moves have flushed out many of those extremes, but they have not settled the debate over whether the United States is heading for recession, inflation or something more nuanced.

With the next Federal Reserve meeting only weeks away, traders must decide whether the tariff thaw is enough to tilt the central bank back towards a hiking bias, or whether officials will focus instead on mixed growth indicators and sticky core inflation. Futures markets now assign a slim chance of another rise this summer, but that probability could shift quickly if data confirm that business confidence is reviving.

In the short run, the path of least resistance for equities appears higher: positioning still leans defensive and corporate buybacks restart after the current earnings blackout. Yet cautious voices warn that corporate margins remain under pressure from wage growth, that credit spreads have not fully retraced, and that a single diplomatic gesture does not undo years of strategic rivalry.

Investors bruised by the rally have three choices: chase the move, sit tight in the hope of another pull-back, or rotate into less crowded positions such as non-US shares and commodities that benefit from revived Chinese demand.

Whichever route they pick, the spring of 2025 will be remembered as a moment when a tentative diplomatic handshake upended some of the Street’s most popular macro trades.