Global markets rallied in May, driven by what many have dubbed the “TACO trade”, short for “Trump Always Chickens Out”. The surge followed news that the United States and China had agreed to a 90-day tariff truce, cutting tariffs on Chinese imports into the US from 145% to 30%.
Markets responded positively. The S&P 500 rose 6.3%, the STOXX Europe 600 gained 5.1%, the Nikkei 225 advanced 5.3%, and the ASX 200 added 4.2%. Big tech led the way, with the NASDAQ Composite jumping 9.7%.
Given the unpredictable nature of US trade policy, we caution against relying on the TACO trade moving forward. This is underscored by Trump’s 50% tariff on European imports scheduled for 1 June, later pushed to 9 July, and recent legal back-and-forth in the US courts regarding tariff enforcement.
Also during the month, progress was made on the “One Big Beautiful Bill Act”, which passed the House and is expected to clear the Senate in early July. The bill could add an estimated US$4 trillion to government debt over the next decade. It makes the 2017 Tax Cuts and Jobs Act permanent and introduces new tax breaks, including exemptions on tips, overtime, and auto loan interest for US-made vehicles.
The bill’s passage, coupled with expectations that the Federal Reserve will hold rates steady into the second half of 2025, pushed US two-year and ten-year Treasury yields higher.
In Australia, the Reserve Bank of Australia cut the cash rate by 0.25% to 3.85%. This marked the second cut in the current easing cycle and signalled greater comfort with the inflation outlook. Trimmed-mean inflation forecasts were revised slightly lower from 2.7% to 2.6%, while the outlook for wages and GDP growth was softened. Inflation risks are now seen as more balanced, helped by energy rebates and easing global demand. Markets expect another 0.25% cut at the RBA’s July meeting.
Looking Ahead
The past few months have been anything but dull. Trump’s maximalist approach to foreign and economic policy since April has tested market resilience. The aggressive tariffs and their rapid reversal sparked a V-shaped market move.
The legality and durability of the tariff regime, and how other nations respond, will remain front of mind for investors. So too will the outcomes of negotiations with key US trading partners, including Europe, Japan, South Korea and India by 9 July, and China by 11 August.
Regardless of the short-term noise, we believe our portfolios are well positioned. The Investment Committee continues to monitor developments closely and remains ready to act should conditions change.