As Trump-Xi trade talks near, investors turn to history

Investors are heading into this week's trade talks between the U.S. and Chinese leaders with a sense of deja vu, excited by the proclamations of a truce and apprehensive the real deal may offer far less to celebrate. Stock markets across the world jumped on Monday after U.S. officials said negotiators from both sides had hashed out a framework for agreements for lower US tariffs on Chinese imports and Chinese concessions on rare earth export curbs.

As expectations build for US President Donald Trump to sign that deal with Chinese President Xi Jinping on Thursday and for some respite in the long mercurial relationship between the world's top two economies, the S&P 500 index rose 1% to hit a record high.

Stock markets in South Korea, Taiwan and Japan, too, notched new highs, while traditional havens such as gold fell in a sign investors were prepared to take more risky bets. It's a pattern markets have followed through Trump's first and now second presidencies, such as during the 2019 trade war with China and after his "Liberation Day" global tariff blitz this year, positioning for Trump to eventually back down after going on the offensive against trade partners.

"We had this big headline, markets sold off, we had some wobbles on that, but now it seems that talks are constructive again and now that's being faded," Evelyne Gomez-Liechti, multi-asset strategist at Mizuho, said.

"To be honest whenever we get all these headlines from Trump it also follows this TACO pattern. I feel like this was just the strategy again," she said. "TACO" — Trump Always Chickens Out — is a Wall Street acronym for the view that the president makes big threats but eventually backs down. In the past month, stocks fell after Trump threatened to impose additional 100% tariffs on imports from China as well as export controls on critical US-made software, after Beijing tightened its rare earth restrictions. Repeating the TACO pattern, Chinese stocks have been rising for more than a week in the run-up to the Xi-Trump talks.

Even if the Trump-Xi meeting does not produce a definitive end to their trade war, investors are prepared to buy into any de-escalation in tensions. "There is not an insignificant number of discretionary fund managers who have been wary given enormous ructions we've been seeing to the global trade environment," said Ross Hutchison, head of euro zone market strategy at Zurich Insurance Group. "There genuinely is scope for those investors to buy into positive news flow here," he said.

While trading the trade talks has become a familiar drill, investors have other reasons to be both bullish and cautious.

"The risk of having a bad outcome in order to score political points is not that high because there's not that many political points to be scored on either side," said Thomas Christiansen, chief investment officer and head of emerging market debt at private bank Union Bancaire Privée, London. "Ultimately if you think of this as some sort of prisoner's dilemma, the right outcome is always going to be some level of agreement."

Also, the Federal Reserve could be cutting rates this week again and even possibly easing liquidity, which could further stoke the market rally.

However, with stocks at all-time highs and heavy concentration in AI-related stocks, disappointing earnings could offset any optimism from a US-China trade deal or amplify a negative outcome from the Trump-Xi meeting.

"It is not symmetrical. The market will react to the downside more than the upside," said Tracy Chen, Brandywine Global portfolio manager of global fixed income.

The market is assuming that eventually there will be an average 15% reciprocal tariff between the U.S. and most of its trade partners, said Art Hogan, chief market strategist at B. Riley Wealth. "If something adversely affects that, one way or the other, I certainly think that there's more downside risk," he said.

Investors have history as a guide to such letdowns too, the latest being after the May 2025 US deal with China in Geneva.

"US and China have a history of negotiations breaking down even after a preliminary agreement," Thierry Wizman, Global FX & Rates Strategist at Macquarie, said in a note.

"We expect the enthusiasm to fade," he said.

Reuters