US-China tensions re-emerge and drive momentum

• Renewed tensions between the US and China take markets by surprise
• Will the 100% tariff be introduced or just used as a bargaining chip?

A subdued week for risk assets was upended late on Friday after fresh US–China trade tensions re-emerged. Through most of Friday’s European session, equities were stabilising after a politically driven wobble earlier in the week in Europe. By the time US cash markets opened, the S&P 500 looked set to close roughly flat on the week—evidence that, despite a re-introduction of volatility, dip-buyers still had the upper hand. That changed late in the US Day when the 100% tariff threat hit the wires. Futures lurched lower, cyclicals underperformed, and havens caught a bid. A subsequent, more conciliatory tone on social media helped spark a relief bounce into Monday’s Asian trade, with US futures and several Asian indices coming off their lows.

S&P 500 daily chart

Past performance is not a reliable indicator of future results.

Rare earths sit at the heart of the modern economy, feeding everything from high-end semiconductors to EV motors and advanced defence technologies. China’s latest restrictions—widely viewed as a response to existing US export controls on chips and manufacturing equipment—look less like an economic sledgehammer and more like a negotiating lever. The message appears twofold: first, to put export controls on the table alongside tariff rates; second, to coax both sides back into focused talks after months of drift.

Investors have been asking the right question since Friday: why now? One plausible answer is that Beijing is attempting to shape the next phase of negotiations—on tariffs, on export controls and, potentially, on inbound investment rules—by reminding Washington where critical supply chokepoints still exist. Whether this escalates into hard restrictions or remains theatre to extract concessions is the single biggest swing factor for near-term risk sentiment.

The violent knee-jerk told us as much about positioning as it did about policy. Valuations had become rich, momentum extended and volatility sellers comfortable. Markets had been trading as if the tariff saga was largely resolved thanks to progress with the EU, Japan and Korea—China being the conspicuous loose end. When that assumption cracked, crowded longs scrambled. Monday’s efforts to retrace part of the move are consistent with a classic positioning flush rather than a fundamental trend change—for now. The path from here hinges on whether the 100% tariff threat remains active or is walked back quickly.

For more market insights, please visit: https://capital.com/en-gb/analysis/daniela-hathorn