Goldman Sachs chief economist Jan Hatzius says preliminary trade agreements with a few countries could come soon

Trade deal hopes buoyed stocks and sparked profit taking on gold after the US and China said officials would meet for the first time since the tariff war erupted.

In recent days investors understandably began hedging their bullish bets on stocks once again. Picture: AFP

Trade deal hopes buoyed stocks while sparking profit taking on gold after the US and China said key officials will meet this weekend on trade for the first time since the tariff war erupted last month.

However Australia’s ASX 200 stock index is already just a few percentage points off its record high after more than fully recovering from the April 2 “Liberation Day” tariffs announcement, after a 90-day pause on reciprocal tariffs, carve-outs for certain industries and talk of trade deals to come.

After the S&P 500 fell for a second day running, the confirmation that US Treasury Secretary Scott Bessent, US Trade Representative Jamison Greer and China’s Vice Premier He Lifeng will meet this weekend may have simply deferred a reality check on the trade deal optimism that began to wane after President Trump downplayed tariff talks, saying “we don’t have to sign deals.”

“We’re going to put very fair numbers down, and we’re going to say, here’s … what we want,” Trump said. And congratulations, we have a deal. And they’ll either say ‘great,’ and they’ll start shopping, or they’ll say, ‘not good,’” Trump said Tuesday at the White House. “It’s going to be a very fair number, it’ll be a low number. We’re not looking to hurt countries,” he added.

In recent days investors understandably began hedging their bullish bets on stocks once again.

Gold bounced over 7 per cent to a record high close of $US3431.77 per ounce just as stocks began to falter after a stunning rebound which left investors.

But with gold diving as much as 2.1 per cent to $US3360.32 in Asia-Pacific trade on Thursday, it may signal a retest of chart support at $US3200 that could favour stocks in the short term.

Stocks were also supported by 10 monetary policy stimulus measures from the People’s Bank of China, including a 10 basis points cut in the policy rate and a 50 basis points cut in the reserve requirement ratio that’s expected to inject CNY1 trillion of liquidity.

However, while long overdue amid China’s structural economic weakness, one concern with its stimulus – and potentially more to come – is that China is preparing for a fight on trade.

“The tariffs could have started to weigh on the Chinese economy, and domestic easing could also create more leverage for China in the upcoming trade negotiations,” said Citi’s chief China economist, Xiangrong Yu.

Scott Bessent said the current tariff rates aren’t sustainable and were the equivalent of a trade embargo, but the trade talks on Saturday and Sunday will centre on de-escalation rather than a big trade deal, “but we’ve got to de-escalate before we move forward,” he said.

“We don’t want to decouple, what we want is fair trade,” Bessent said.

But markets may need more than a “de-escalation” of trade tensions between the US and China.

Even sustained tariffs of 50-60 per cent would be a significant growth shock and inflation risk.

While the trade talks appear to be going smoothly with about 20 countries said to have made trade proposals to the US, there has to be a significant risk of a breakdown in the trade talks with China.

As much as US tariffs are hurting China’s exports, the Chinese Communist Party is potentially not as beholden to public outcry as the US Administration. If China were to allow the weekend talks to breakdown, US stocks would presumably tank, increasing the pressure on Trump to back down.

China’s Ministry of Commerce said the US should “show sincerity” in the talks, correct wrong practices and resolve the concerns of both sides through “equal consultation”.

“If you say one thing and do another, or even attempt to continue to coerce and blackmail under the guise of talks, China will never agree, let alone sacrifice its principled position and international fairness and justice to seek any agreement,” the ministry added.

Meanwhile, the Fed is widely expected to keep rates on hold when its meeting concludes at 4am (AEST) on Thursday, but chair Jerome Powell will again need to choose his words carefully so as to simultaneously show appropriate concern about the risk of stagflation while keeping alive market expectations of about 100 basis points of interest rate cuts over the next 12 months.

Trump also said he will be making a “very big announcement” before he departs on his trip to the Middle East on Monday and he hinted that it wasn’t necessarily on trade

The announcement was said to be “positive” and “as big as it gets”.

Meanwhile, there’s also a great deal of optimism on the US economy that’s embedded into stock valuations despite US recession probability estimates hovering around 50 per cent.

Goldman Sachs chief economist Jan Hatzius says preliminary trade agreements with a few countries could come soon, and the “mood music” with China has improved.

He expects the US tariff rate on China to be slashed to from about 145 per cent to around 60 per cent relatively soon and that China will reduce tariffs on the US by a similar amount.

Hatzius also notes that the resilience of hard economic data, while dated, has reassured investors.

Nevertheless, his 12-month recession risk estimate remains 45 per cent.

He warns of further tariff increases in pharmaceuticals, semiconductors, and movies, and sees a meaningful risk that some of the paused “reciprocal” tariffs will take effect after July 9.

“Moreover, it is not unusual for hard data to lag significantly in event-driven downturns, and the surge in pre-buying probably lengthens that lag further,” Mr Hatzius says.

“It is notable that the soft data — which have their own shortcomings but are less susceptible to pre-buying distortions — have already fallen more than in the typical event-driven recession, even when we take the slightly better-than-expected ISMs for April into account.”

Hatzius also warns that the Fed policy outlook is “very uncertain” and has pushed back the first of the three consecutive “insurance cuts” in his forecasts from June to July.