Global Markets Rally as China Slashes Rates and US Trade Hopes Rise

China’s central bank, the People’s Bank of China, slashed its one-year Loan Prime Rate (LPR) from 3.10% to 3.00% and the five-year LPR from 3.60% to 3.50% on May 20, 2025, in a bold move to stimulate its struggling economy.

Facing a prolonged domestic spending slump, a property sector debt crisis, and high youth unemployment, these historic lows aim to boost consumption and investment.

The rate cuts sparked a rally in Chinese equities, with Hong Kong’s Hang Seng Index climbing 1.2% and Shanghai’s Composite Index up 0.8%.

Contemporary Amperex Technology Co. Limited (CATL) debuted on the Hong Kong Stock Exchange, and shares soared 18.3% as investors bet on the battery giant’s role in the global electric vehicle boom.

However, concerns linger over China’s accusation that the US violated a recent tariff deal, particularly after Washington’s warning against using Huawei’s AI chips, which could reignite trade tensions.

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US Trade Deal and Fed Rate Cut Hopes Lift Sentiment

A US-China trade agreement last week, which reversed the severe tariffs imposed after President Donald Trump's April 2, 2025, tariff blitz, further energized global markets.

Trump’s 90-day suspension of his harshest measures until mid-July has eased fears of a full-blown trade war, pushing equity indices like the S&P 500 and Nasdaq up 0.9% and 1.1%, respectively, on May 19.

Investors are also optimistic about potential Federal Reserve rate cuts, with Bloomberg projecting two reductions in 2025.

However, New York Fed President John Williams and Vice Chairman Philip Jefferson cautioned that persistent inflation risks, driven by tariffs and proposed US tax cuts, may delay easing until September.

Elevated US Treasury yields, with the 10-year note at 4.2%, remain a concern for equity valuations, as noted by Saxo Markets’ Neil Wilson.

Did You Know?
CATL is the world’s largest producer of lithium-ion batteries for electric vehicles, commanding over 37% of the global market share in 2024.

Global Equity Markets Rebound

The positive sentiment rippled across global markets, with Tokyo’s Nikkei 225 up 0.7%, Sydney’s ASX 200 gaining 0.9%, and Singapore, Taipei, Bangkok, Wellington, and Jakarta all posting gains.

In Europe, London’s FTSE 100, Paris’ CAC 40, and Frankfurt’s DAX rose 0.6%, 0.8%, and 0.7%, respectively, in morning trading. Despite the rally, risks persist, including US fiscal concerns following Moody’s downgrade, which projects US federal debt rising to 134% of GDP by 2035.

Real-time market sentiment suggests traders are cautiously optimistic but wary of renewed trade disputes and inflationary pressures from US policy shifts.

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Risks and Uncertainties Loom

While markets bask in the current rebound, analysts warn of lingering uncertainties. Elevated US Treasury yields and potential US tax cuts could undermine fiscal stability, impacting equity markets.

China’s mixed economic signals, with April retail sales at 5.1% year-over-year (below expectations) and industrial production at 6.1%, add to caution.

The ongoing US-China spat over Huawei’s AI chips and tariff compliance could disrupt the fragile trade truce, potentially derailing market gains.

As global investors navigate these dynamics, the interplay of monetary policy, trade developments, and corporate performance will shape the near-term outlook.