US-China Trade Truce Boosts Emerging Markets: $ Weakens, Stocks Recover, and Recession Fears Ease

Emerging markets have experienced a boost following a truce in the US-China trade war. Recently, equity and bond markets in both emerging and developed nations faced turbulence, but the easing of trade tensions has improved market sentiment. After an initial shock from tariff announcements, global stock markets declined, the US dollar weakened against the euro and yen, and long-term US Treasury yields rose. This situation prompted the US to suspend tariffs, excluding those on China. Stock markets have since rebounded, and risk premiums on emerging market bonds have decreased. In May, the US and China agreed to ease trade tensions for 90 days, significantly reducing tariffs. While the possibility of a renewed escalation remains, equity markets have reacted positively, with some reaching new highs. The potential for China to meet its growth target of around 5% has increased, and the likelihood of a US recession has decreased. Capital flows into the US have reversed, potentially weakening the dollar, which historically benefits emerging market assets. Lower oil prices and favorable valuations in emerging markets further support equity prices. Military conflicts between India and Pakistan are currently viewed as limited in impact.