Pre-Market Pulse 3rd June – Stocks ignore the geopolitics and the economy to reverse early losses

Overnight – Stocks ignore the geopolitics and the economy to reverse early losses

Stocks shrugged off rising tensions between China and the U.S. that threatens to spark a global trade war between the largest two economies.

Stocks reversed course after a strong May, during which the S&P 500 posted a gain of over 6%, its best monthly performance since November 2023. This rally was driven by optimism surrounding a temporary truce in the U.S.-China trade war, as both nations agreed in mid-May to pause triple-digit tariffs for 90 days and China pledged to lift export restrictions on critical metals needed by U.S. industries. However, the positive momentum was interrupted as trade tensions flared anew, with President Trump accusing China of breaching the Geneva agreement and announcing a doubling of steel tariffs to 50%, effective June 4. In response, China rejected the accusations as “groundless” and vowed to take “forceful measures” to protect its interests, further escalating uncertainty in global markets.

Amid these renewed trade hostilities, investors turned their attention to upcoming economic data and Federal Reserve commentary for guidance. While Fed Chair Jerome Powell refrained from providing new policy signals, other officials indicated that the central bank could still cut rates later in the year if inflation continues to ease and the labor market remains resilient. Fed Governor Christopher Waller and Chicago Fed President Austan Goolsbee both suggested that the inflationary impact of tariffs may be temporary and, provided underlying inflation trends remain favorable, “good news” rate cuts could be warranted. Meanwhile, the May nonfarm payrolls report is expected to show a slowdown in job creation compared to April, adding to the cautious outlook.

On the corporate front, chip stocks pared losses despite reports that the Trump administration may further tighten restrictions on Chinese tech firms. Conversely, U.S. steel and aluminum stocks surged in anticipation of higher tariffs, benefiting companies like Cleveland-Cliffs and Nucor. Energy shares also gained as OPEC+ announced a third consecutive monthly oil production increase of 411,000 barrels per day for July, aiming to restore market share and stabilize prices amid robust fundamentals and low inventories. Overall, while May’s market gains reflected optimism over easing trade tensions, the resurgence of tariff threats and global policy uncertainty have left investors bracing for more volatility in the weeks ahead.