Trade Negotiations

The week started off hot with new US–China trade negotiations in London. After the trade spat that followed massive tariff hikes and export restrictions, both countries agreed to restart negotiations and temporarily ease some of the export controls last month. Then, both the US and China accused each other of breaking the initial agreement. After a chaotic few days, Trump and Xi spoke, and a new round of talks began. 

The main focus of these talks is on rare earths. The US is heavily dependent on China for rare earths, and after Trump’s aggressive tariff policy, China is now leveraging this dependence to push back against the tariffs and curbs. On the other hand, China needs semiconductors, AI chips, chemicals, jet engine parts, and many other tech components. 

According to speeches from Kevin Hassett and Donald Trump, the negotiations are well underway, and reports are optimistic. The US is leaning toward easing restrictions on many tech products and some semiconductors but not the “very high-end stuff,” according to Hassett. Nvidia’s H20 chips, which were designed specifically for China with limitations to bypass chip curbs, appear to fall under that “very high-end” category. The Trump administration recently extended restrictions to block H20 as well. 

(Bloomberg Trade Policy Uncertainty Index) 

It’s unclear whether China will agree to terms without further incentives from the U.S., but markets are reacting positively to the ongoing trade negotiations. Following the Trump–Xi call and optimistic remarks from Trump, Bloomberg’s Trade Policy Uncertainty Index has started to decline again in early June. China appears to hold more leverage than Trump initially anticipated, which could be a positive for markets. Traders are already pricing in continued de-escalation of the trade war, perhaps a bit too optimistically despite many stagflation signals in recent economic data. The dollar is beginning to slow its descent, gold has turned flat after its sharp pullback from 3500, and stocks are attempting to approach recent highs. 

(Dollar Index – 4H) 

The Dollar Index initially surged to 110 on expectations of incoming tariffs, but the market soon realized that the impact of tariffs on economic growth could be much greater than first anticipated. Since reaching 110, the index has been in a downtrend. Recently, the trendline has been tested more frequently, with traders increasingly betting on a dollar rebound amid easing trade uncertainty. However, the trend remains intact, and there is a risk of a long squeeze due to crowded long positioning, especially if no significant deal is reached. 

If China and the U.S. manage to agree on a meaningful trade deal that eases curbs on both U.S. tech exports and Chinese rare earths, the dollar could break the trendline and begin a correction that may extend to 104 in the medium term. 

(S&P 500 E Mini Index – 4H) 

Stock market were the first to price in the easing of trade uncertainty, staging a strong rebound from below 5000. Now, prices appear to be contracting into a wedge-like pattern. If the negotiations bear fruit, this bearish setup could be ignored by the market, something the S&P 500 has done many times before. However, it’s also important to monitor the VIX index for early warning signs; see our monthly report for more details on this topic. 

If a trade deal cannot be reached, a sharp selloff toward levels below 5500 is likely. 

(XAUUSD – 4H) 

Gold, meanwhile, has a bullish technical setup as the London negotiations continue. The triangle formation broke to the upside, and now the downtrend line from the 3500 top is acting as support, along with the 38.2% Fibonacci retracement level. If no deal is reached or if the deal lacks significance, gold could make another attempt toward 3500 in the coming weeks. However, if it loses support from the trendline, dormant gold bears may re-enter the market.