Stocks Rise As U.S-China Tariff Truce Sinks Volatility

The market turbulence triggered by President Donald Trump’s aggressive trade stance in April has eased significantly following a temporary truce between the United States and China. This shift in tone brought about a noticeable drop in volatility, with the Cboe Volatility Index (VIX)—widely regarded as Wall Street’s "fear gauge"—plunging nearly three points on Monday. It reached its lowest intraday level in 45 days, falling below its long-term average of 20 and settling at 19.3 just before the U.S. stock market opened.

‍

This decrease in the VIX reflects growing investor confidence after the two economic superpowers agreed to temporarily suspend tariffs on each other’s goods. With fears of an all-out trade war subsiding for the moment, the cost of protecting against sharp declines in equity markets has become cheaper.

‍

According to Stuart Kaiser, head of U.S. equity trading strategy at Citigroup Inc., the short-term agreement between the U.S. and China has significantly reshaped how traders view market risks.

‍

“The reprieve on China tariffs marks a key turning point for near-term risk,” Kaiser noted in a research report. “As tail risk—those unlikely but severe downside scenarios—becomes less costly to hedge, we expect systematic buyers to re-enter the market and economic indicators to be temporarily overlooked.”

‍

The agreement, reached during negotiations in Geneva, involves substantial reductions in tariffs that had been ratcheted up in recent months. The U.S. had levied tariffs as high as 145% on most Chinese imports, while China retaliated with 125% tariffs on U.S. goods. Under the new deal, those figures will drop dramatically, with U.S. tariffs reduced to 30% and Chinese tariffs cut to 10%. While this rollback is only set to last for 90 days as talks continue, its scale was greater than what many analysts had anticipated.

‍

David Seif, chief developed markets economist at Nomura Holdings Inc., said the depth of the tariff reductions caught much of Wall Street by surprise. “This is a much bigger reversal than expected,” he remarked. “But if the negotiations break down before the August 10 deadline, market sentiment could just as quickly reverse.”

‍

Still, Seif believes that the temporary tariff relief could drive stronger economic growth and potentially lower inflation more than prior forecasts suggested. For now, the market is responding positively. On Monday, the S&P 500 Index surged by as much as 3%, reaching its highest level since early March. The rally was driven by renewed optimism that the world’s two largest economies might be moving toward a more stable trade relationship.

‍

Meanwhile, changes in expectations around market volatility show how swiftly sentiment has shifted. In April, the VIX had been indicating more stress in the present than in the future, suggesting heightened investor concern.

‍

However, the current outlook reflects the opposite: traders are now anticipating that volatility will increase again in the coming months, even though the present environment has calmed.

‍

This turnaround underscores how reactive markets have become to geopolitical developments, especially when they involve trade policy between Washington and Beijing. April’s surge in volatility was driven by fears of an escalating tariff war that could derail global growth. Now, with a cooling of tensions—albeit a temporary one—investors are recalibrating their risk assessments and pouring back into equities.

‍

Nevertheless, caution remains. While the 90-day pause is a relief, it doesn’t represent a full resolution. There is still a high degree of uncertainty about what happens after the current agreement expires. If talks stall or tensions flare up again, market volatility could spike just as quickly as it fell.

‍

In summary, the market’s volatility gauge has taken a sharp dip as a result of a temporary tariff truce between the U.S. and China. This has reduced the cost of hedging against downside risk and driven a rally in U.S. equities, especially the S&P 500.

‍

While the tariff reductions exceeded expectations and created a more optimistic short-term outlook, analysts warn that the situation remains fragile, with future volatility likely to increase again if no lasting trade deal is reached by August.

‍