The Overnight Report: Buy Trumpilocks

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Robust risk-on rallies in the US are setting up the ASX200 for a strong start, post a fade in trade yesterday afternoon ahead of the US/China tariff announcement. Local futures are pointing to a rise at the start of trade of over 1%.

World Overnight
SPI Overnight	8360.00	+ 93.00	1.12%
S&P ASX 200	8233.50	+ 2.30	0.03%
S&P500	5844.19	+ 184.28	3.26%
Nasdaq Comp	18708.34	+ 779.43	4.35%
DJIA	42410.10	+ 1160.72	2.81%
S&P500 VIX	18.39	– 3.51	– 16.03%
US 10-year yield	4.46	+ 0.08	1.87%
USD Index	101.62	+ 1.45	1.44%
FTSE100	8604.98	+ 50.18	0.59%
DAX30	23566.54	+ 67.22	0.29%

Good Morning,

US markets staged a sizeable risk-on rally due to a better than feared outcome from the Geneva US/China tariff talks. The 90-day pause and associated tariffs are higher than markets originally expected, but that won’t matter today.

What happened overnight: Extract NAB Markets Today Research

The announcement just after the local Australian market close Monday that the US was reducing the tariffs on China imports to 30% from 145% for 90 days and that China was reducing its tariffs on US imports to 10% from 125%, had an electrifying effect across stocks (up) the US dollar (up) and bond prices (down). 

The latter, as expectations for the extent of 2025 Fed easing were further pared back (to 56bps from 66bps prior). 

What happens in the next 90 days is frankly anyone’s guess, but markets are understandably proceeding on the basis that the eventual US-China tariff regime will be far less draconian than was muted prior to the election (60% China tariffs), and dramatically different from the liberation day reciprocal tariff announcements.

Separate to the trade news and as indicated on Sunday night Washington time, President Trump on Monday morning signed an Executive Order (EO) aimed at lowering the cost of prescription drugs by tying US prices to those of other countries. 

The outcome, if achieved, could be significant falls in US drug prices, but potentially see higher prices imposed on the rest of the world, including Australia.

Trump’s accusation is that US drug companies charge much more to their US customers than they do overseas, implying US customers are paying for much of the R&D, marketing and other expenses they incur. 

For now, though, the executive order is only asking for voluntary actions by US drug companies to bring this about, as a result of which pharma stocks rallied post the announcement.

The reduction in the US tariff rate on China to 30% represents the baseline 10% tariff on everyone announced on ‘liberation day’ plus the previously announced and implemented 20% tariff related to fentanyl and fentanyl precursors. 

Treasury secretary Bessent intimated the latter could be adjusted down, but that China tariffs would in no circumstances fall below the 10% baseline. 

He said the US was seeking “a long-lasting and durable trade deal” with China and a clear break between the two economies wasn’t desirable and “neither side wants to decouple”. President Trump said he would likely speak to President Xi later this week.

At the new 30% overall rate, the effective tariffs rate is a little north of 40% (the pre-Trump 2.0 effective tariff rate was reckoned to be a little over 10%). 

Still enough, let’s not forget, to have meaningful inflation and growth implications. Indeed, Fed governor Kugler speaking after these latest announcements, said Trump’s tariff policies are likely to boost inflation and weigh on economic growth, even with the recently announced reduction in China levies. 

She repeated a point that the average tariff rates in the US are still much higher than they have been for decades.

The positive smoke signals emanating from US officials on Sunday evening meant markets were already anticipating good news on tariffs in the run up to the formal announcements, seeing US equity futures and the US dollar smartly higher and US Treasury yields up 2-3bps. 

Post the formal announcements, US 2-year yields extended their rise to 11bps versus last Friday’s NY close to 4.0%, and US 10-year yields up 10bps to 4.495%, the highest since the 11 April yield ‘melt up’. 

The S&P500 gain of 3.26% means it has retraced a little over 75% of its mid-February through early April 21% fall. Ditto the NASDAQ, following its 4.35% Monday gain.

Symptomatic of the less pessimistic view of global growth and hence demand, as premature as that may yet prove, crude oil prices are up over a dollar (WTI US$1.04, Brent US$1.13) while the LMEX index of industrial metals is up 1% and Singapore iron ore futures up 2.5%. Gold on the other hand fell US$88 or 2.7% – it’s now some 6% back on its 6 May record high.

Finally in late in the day news, House Republicans have unveiled president Trump’s tax plan that raises the state-and-local tax deduction, ends some taxes on tipped income and overtime pay and extends President Trump’s expiring 2017 tax cuts, partially paid for by rolling back tax breaks for electric cars and clean-energy production.

US indices performance year-to-date:

-Dow Jones Industrial Average: -0.3%

-S&P500: -0.6%

-Nasdaq Composite: -3.1%

-Russell 2000: -6.2% 

Tariff truce: Extract from Benoit Anne, MFS Investment Management

Incarceration Day. If April 2nd was Liberation Day, this may feel like Incarceration Day then. 

In any case, let’s party as if it were pre-April 2025. 

The pendulum appears to be swinging hard, but this time as a major boost to risk sentiment, following the announcement of major reductions in tariffs between the US and China for 90 days. 

Risky assets are recovering aggressively, while UST treasury yields are rising, as the risk of recession is being priced out. 

While this is a positive development, it is worth highlighting that policy uncertainty is likely to stay elevated, and therefore there is a risk that macro volatility may continue to represent a major challenge in the period ahead. 

If, however, we get some confirmation that there will now be a bit more stability and permanency to the policy environment, this will come down in recent market history as a major turning point. 

The most favorable version of Trumpilocks, the prevailing macro regime, is characterized by supportive macro drivers for risky assets, stronger growth expectations, higher yields, tighter spreads, and reduced tariff-related inflation fears. 

With that in mind, inflation-linked instruments may underperform their nominal counterparts, if inflation risks get repriced lower in the face of higher yields. 

If the Trumpilocks best-case takes hold, we will also likely observe a decline in correlation between equities and bondsalbeit gradually, which means that fixed income is back to providing diversification benefits. 

Looking ahead, it will also be interesting to watch whether flows will swing back to the US after the post-Liberation Day shock to investor confidence. 

The dollar on the hedge. While the USD appears to be bouncing back, at least for now, benefiting from the trade war truce announcement, there are still some fundamental risks to the US currency. 

The main risk relates to the hedging strategy of international investors. 

After years of structural dollar strength, it appears that the average hedge ratio of large institutional investorssuch as the Japanese life insurershas fallen to historically low levels, partly reflecting the higher cost of hedging. 

Specifically, the Bank of Japan reported that the hedge ratio of the nine largest life insurance companies fell to just over 40% in 2023 from 60% historically.

Likewise, from the European equity investor standpoint, traditionally, exposure to US equities on an unhedged basis used to offer European investors both higher returns and lower volatility. 

This year has proven quite different, however. 

Overall, if international investorswho have owned an increasing larger share of USD assetsraise their FX hedge ratio, it will likely contribute to applying downside pressures on the USD. 

 Corporate news in Australia 

-Dyno Nobel ((DNL)) has sold its fertiliser business for $375m to Ridley Corp ((RIC)).

-Helloworld Travel ((HLO)) has acquired a 5% stake in Webjet Group ((WJL)).

-Betr Entertainment ((BTT)) has started due diligence on PointsBet Holdings ((PBH)).

-Stripe has refuted speculation it is interested in Tyro Payments ((TYR)).

On the calendar today:

-AU April NAB Business survey

-EZ May ZEW

-UK March unemployment

-US April CPI

-US April NFIB

-LIFE360 INC ((360)) Qtr report

-ANZ GROUP HOLDINGS LIMITED ((ANZ)) ex-div 83.00c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

Spot Metals,Minerals & Energy Futures
Gold (oz)	3241.69	– 102.31	– 3.06%
Silver (oz)	32.73	– 0.18	– 0.55%
Copper (lb)	4.63	– 0.02	– 0.51%
Aluminium (lb)	1.12	+ 0.02	2.06%
Nickel (lb)	7.03	+ 0.01	0.16%
Zinc (lb)	1.22	+ 0.01	0.84%
West Texas Crude	62.07	+ 1.05	1.72%
Brent Crude	65.05	+ 1.14	1.78%
Iron Ore (t)	99.75	+ 1.20	1.22%

The Australian share market over the past thirty days

Index	12 May 2025	Week To Date	Month To Date (May)	Quarter To Date (Apr-Jun)	Year To Date (2025)
S&P ASX 200 (ex-div)	8233.50	0.03%	1.32%	4.97%	0.91%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AVH	Avita Medical	Downgrade to Speculative Buy from Add	Morgans
CYL	Catalyst Metals	Upgrade to Buy from Hold	Bell Potter
GMG	Goodman Group	Upgrade to Buy from Neutral	UBS
MQG	Macquarie Group	Upgrade to Neutral from Sell	Citi
		Upgrade to Add from Hold	Morgans
NST	Northern Star Resources	Upgrade to Buy from Neutral	Citi
SIQ	Smartgroup Corp	Downgrade to Hold from Buy	Bell Potter
TNE	TechnologyOne	Downgrade to Hold from Buy	Bell Potter

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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