May 12th Market Overview

Happy Monday.

Huge relief rally today after the U.S. and China struck a surprise deal over the weekend to dramatically slash tariffs. Unexpected depth of the cuts even sent the ol’ Dow up over 1,100 points as recession odds got repriced lower. I’ve Ive been regurgitating forever now - a deal with china is extremely bullish for the markets.

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Let's dig in...

Executive Summary

• A surprise U.S.-China agreement to temporarily slash tariffs ignited a significant market rally today.
  

• U.S. duties on many Chinese goods will fall to 30%, while Chinese retaliatory tariffs drop to 10%, levels far below prior market expectations.
  

• The deal eased recession fears, boosting technology and other trade-sensitive stocks.
  

• President Trump’s executive order on prescription drug pricing created initial volatility for pharmaceutical stocks.

Market Overview

Key Market Drivers

1. U.S.-China Deal Details: U.S. cut tariffs to 30% (including 20% fentanyl-related levy); China reduced to 10%. This 90-day pause exceeded Wall Street's 60-80% expectations. Bessent called talks "productive" and scheduled follow-up meetings.
   

2. Market Surprise Factor: Analysts were caught off guard by the depth of cuts. Buchbinder noted "No one had these rates on their bingo cards" while cautioning "this is de-escalation, not a trade deal."
   

3. Fed Rate Outlook Shifts: Recession fears faded immediately. CME FedWatch shows 57% odds of no rate cuts through July, up from 40% Friday. Treasury yields jumped accordingly.
   

4. Drug Pricing Order: Trump's "most favored nation" policy ties U.S. drug prices to lowest global rates. Pharma stocks initially dropped, then recovered as implementation details emerged.
   

Stock Spotlight

Tesla $TSLA ( ▲ 6.42% ) rejoined the trillion-dollar market cap club today. The electric vehicle maker has faced declining sales in China amid increasing competition from local manufacturers, making improved trade relations particularly significant for its outlook.

NRG Energy $NRG ( ▲ 25.46% ) surged on news of a $12 billion acquisition of natural gas generation assets from LS Power, doubling its generation capacity to 25 gigawatts. The deal positions NRG to meet rising power demand from AI data centers and broader economic electrification.

Apple $AAPL ( ▲ 6.04% ) gained but remains the only megacap tech stock yet to fully recover from "Liberation Day" losses. The company manufactures most iPhones in China, making it particularly sensitive to trade developments. President Trump mentioned speaking with CEO Tim Cook, who reportedly plans to invest in additional U.S.-based facilities.

Amazon $AMZN ( ▲ 7.67% ) advanced as the e-commerce giant sells countless Chinese-manufactured products on its platform, making reduced tariffs directly beneficial to its business model and cost structure.

Nvidia $NVDA ( ▲ 5.37% ) rose as the semiconductor sector has been a central point of contention in U.S.-China trade disputes. Any de-escalation provides both supply chain relief and potential market access benefits.

Big Name Updates

Broadcom $AVGO ( ▲ 5.5% ) regained its trillion-dollar market capitalization for the first time since February, reflecting renewed investor confidence in the semiconductor sector.

Best Buy $BBY ( ▲ 6.14% ) climbed after previously warning that high tariffs would significantly impact its sales growth. The electronics retailer sources many products from China.

Williams-Sonoma $WSM ( ▲ 8.55% ) gained as the home-furnishings retailer sources nearly a quarter of its products from China, making it directly exposed to tariff developments.

Nike $NKE ( ▲ 6.98% ) and Lululemon $LULU ( ▲ 8.17% ) rose as these apparel companies maintain significant manufacturing in Asia while generating substantial U.S. sales.

Other Notable Company News

Musgrave Pencil Co. plans to continue moving production from China to Vietnam despite reduced tariffs. President Scott Johnson noted the total tariff cost on Chinese slats will still be close to 60% versus just 13% from Vietnam.

The Port of Los Angeles doesn't anticipate a surge in imports, with Executive Director Gene Seroka stating that "even at a 30% tariff with a 90-day reprieve, it's not going to dramatically change what we're seeing right now."

The American Apparel & Footwear Association cautioned that even with reduced tariffs, a 30% rate on Chinese goods will still mean higher prices for back-to-school and holiday purchases, potentially worsened if freight rates spike due to shipping disruptions.

Alibaba $BABA ( ▲ 5.87% ) and JD.com $JD ( ▲ 6.53% ) both gained as U.S.-listed Chinese companies rallied broadly.

Sector Watch

Bond Market

• Treasury yields jumped today with the 10-Year reaching 4.465%

• Traders now see a 57% chance of rates staying unchanged through July, up from 40% Friday

• The surge in yields reflects a swift reassessment of recession risk and Fed policy needs

Policy Watch

• Treasury collected a record $16.3 billion in tariff revenue in April, up $7.6 billion from March

• Fed Governor Kugler stated monetary policy is “well positioned” while promising to monitor tariff effects

• Trump characterized the China agreement as a “total reset” with Beijing agreeing to “fully open” to U.S. imports

• Looking beyond China, Trump called the EU “in many ways nastier than China” on trade, signaling potential focus there next

What to Watch

1. Follow-up Trade Negotiations: Treasury Secretary Bessent meets with Chinese officials in "the next few weeks." Watch for:

   • Concrete timeline announcements vs. vague statements

   • China's reciprocal commitments on intellectual property

   • Sector-specific carve-outs or exceptions

   • Market reaction to comments from Vice Premier He Lifeng
     

2. Corporate Supply Chain Shifts: The 90-day window creates urgency for action:

   • Q2 earnings calls highlighting revised sourcing strategies

   • Container bookings data for June-August shipments

   • Capital expenditure announcements for non-China manufacturing

   • Retailer inventory building ahead of potential tariff expiration
     

3. Shipping & Logistics Metrics: Despite Port of LA's skepticism, watch:

   • Container shipping rates on Trans-Pacific routes

   • Fleet utilization metrics from major carriers

   • Port congestion reports at LA/Long Beach vs. East Coast terminals

   • Ocean booking lead times for June-August shipments
     

4. Pharmaceutical Distribution Disruption: The drug pricing order creates winners and losers:

   • Legal challenges from industry groups (PhRMA likely first mover)

   • Pharmacy Benefit Manager stocks vs. direct-to-consumer platforms

   • Generic manufacturer expansion announcements

   • Hospital procurement changes for high-cost medications

   
   
   Thanks for reading 🙂
   
   - John
   

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