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ASX Sees Sharp Gains Following US-China Tariff Agreement
The S&P/ASX 200 index made a strong opening on Tuesday, buoyed by a new agreement between the United States and China to momentarily reduce tariffs after productive discussions held over the weekend in Switzerland.
In the US, stock markets experienced a significant upswing, with the S&P 500 surging 3.2%. This rise brings the index closer to its breakeven point for the year and within 5% of its record closing in February. Treasury Secretary Scott Bessent described the talks with China as "very productive," leading to a temporary 90-day reduction of tariffs: US tariffs on Chinese imports have decreased from 145% to 30%, while China has lowered its tariffs on US goods from 125% to 10%.
Economic Implications and Stock Performance
Macquarie analysts predict that the easing of tariffs will result in a short-term boost to industrial activity in Australia, potentially benefiting cyclical and resource stocks significantly. The extent of the tariff reductions exceeded prior expectations. Initial assessments suggested the US might taper tariffs to around 50%, but the final outcome was much more extensive.
The analysts noted that equities and commodities—excluding gold—are poised to be primary beneficiaries of the anticipated surge in global growth. The US dollar is likely to gain as market sentiments shift positively towards US economic performance, while bonds might underperform due to persistent inflation risks and the possibility of fewer Federal Reserve rate hikes.
Despite the positive immediate reaction, the broader implications for the Australian market could be limited, potentially resulting in a shift in investment strategy to focus on certain sectors:
Key Beneficiary Stocks
Cyclical stocks that are heavily reliant on the US market are expected to thrive from an uptick in US economic activity and a stronger US dollar, including:
- Block (ASX: XYZ)
- Breville (ASX: BRG)
- Computershare (ASX: CPU)
- Flight Centre (ASX: FLT)
- James Hardie (ASX: JHX)
- Light & Wonder (ASX: LNW)
- Lovisa (ASX: LOV)
- Reece (ASX: REH)
- Reliance Worldwide (ASX: RWC)
- Worley (ASX: WOR)
Additionally, resource stocks—excluding precious metals—are likely to see gains as investors, currently underweight in this sector, respond positively to increased industrial activity stemming from the US-China agreement.
Prominent Resource Stocks
The following top-rated resource stocks are expected to outperform as a result:
- BHP (ASX: BHP)
- Capricorn Metals (ASX: CSC)
- IGO (ASX: IGO)
- Iluka Resources (ASX: ILU)
- Mineral Resources (ASX: MIN)
- Santos (ASX: STO)
- South32 (ASX: S32)
In contrast, defensive sectors—such as groceries, gold, and telecommunications—that benefitted after the so-called "Liberation Day" may not maintain their performance in the short term. Bonds like those of Transurban could face headwinds due to expectations of reduced interest rate cuts.
Caution Advised
Although the tariff pause is beneficial for equities and commodities, Macquarie cautions that challenges lie ahead. Bonds may face difficulties as inflation lingers, even at the reduced tariff levels, and escalating bond yields could hinder growth in US housing markets and the broader economy over the medium term.
Analysts have also pointed out that the recent rally in the ASX has stretched valuations. They believe that the temporary nature of the tariff pause combined with ongoing uncertainties could warrant a cautious approach.
Macquarie analysts noted, "We still anticipate weaker US growth in the medium term following the initial uplift from the tariff pause," adding that ongoing uncertainties around tariffs are unlikely to provide the investment stability that companies require for increased US capital infusion.
In summary, while the recent tariff agreement between the US and China fuels optimism across equity and commodity markets, experts advise prudence as the ASX adjusts to a potentially shifting investment landscape amidst economic uncertainties.
