United States and China: A Fragile Agreement Under Scrutiny

A Temporary Truce

After months of tense negotiations, the US and China have reached an agreement considered « pragmatic » by diplomats but « fragile » by investors. The US has pledged to lower tariffs on Chinese goods from 57% to 47% and to suspend new export controls. In return, Beijing has agreed to freeze its rare mineral restrictions for a year, resume significant purchases of American soybeans, and strengthen efforts to combat the trafficking of fentanyl chemical precursors.
These reciprocal gestures indicate a desire for appeasement, but they do not address the core issue: the strategic and technological rivalry between the world's two largest powers. The markets have taken note. After a brief rally following the announcement of the agreement, US and Asian indices have remained cautious, aware that this truce might only be a tactical pause before new tensions arise.
The experience of 2023 has demonstrated this reality: the previous Geneva and London agreement, hailed as a turning point, quickly unraveled over rare earth trade. Analysts remind us that the current commitments do not include any enforcement mechanisms for non-compliance, which limits their actual impact.

A Cautious Fed and Markets Seeking Clarity

At the same time, the U.S. Federal Reserve has attempted to maintain a course of controlled austerity. As expected, the central bank implemented a rate cut at its latest meeting but struck a tone considered firmer than anticipated. Jerome Powell, its chairman, emphasized that « another cut to the benchmark rate at the December meeting is not guaranteed. » This statement dampened the enthusiasm of investors who had been anticipating extended monetary easing.
This shift was well-received by the bond markets, which view it as proof of the Fed's independence from political pressures. Inflation expectations have remained stable, indicating that the central bank maintains credibility in its price control strategy. However, for equities, the message was quite different: the prospect of prolonged tightening fueled another phase of volatility, exacerbated by investor caution regarding still-uncertain Chinese growth.
In the tech sector, the signals are mixed. Alphabet's stock was buoyed by the growth in users of its AI model, Gemini, while Meta faced penalties for what were deemed excessive investments in artificial intelligence. This ongoing debate about AI's return on investment highlights the uncertainty surrounding the costs and actual potential of this industrial revolution.

For strategists at Franklin Templeton, the lesson is clear: the promises of artificial intelligence are real, but selectivity will be crucial. Winners and losers will continue to stand out in the years to come. They advocate for increased diversification toward US cyclical stocks, small caps, and non-US markets, which are considered more attractive in terms of valuations.
In the short term, the Sino-American truce eases pressure on supply chains and provides a bit of breathing room for global trade. However, investors are aware that this commercial peace is built on fragile foundations. Any political, technological, or monetary slip could reignite tensions—and bring back volatility.