Tactical Bullishness vs. Strategic Uncertainty: Positioning for the 90-Day Trade Truce

The U.S.-China trade truce announced on May 14, 2025, has injected a shot of adrenaline into global markets, with U.S. stock futures soaring 1.7% and Asian equities climbing sharply. This 90-day pause in the tariff war offers a critical window for tactical gains—but investors must tread carefully. While the immediate relief has strengthened the dollar and buoyed risk assets, unresolved structural issues and shifting Fed policies loom as clouds over the horizon. Here’s how to navigate this precarious balance between optimism and caution.

The Tactical Bull Case: Dollar Strength and Cyclical Rebound

The tariff suspension has reignited hopes of a trade normalization, with the U.S. cutting tariffs on Chinese goods from 145% to 30%, and China reciprocating by lowering its retaliatory tariffs from 125% to 10%. This de-escalation has two immediate effects:

1. Dollar Gains: Reduced trade friction has reinforced the greenback’s safe-haven status. The U.S. dollar index, which measures the currency against six major peers, has climbed to 108.5—its highest level since early 2023. A stronger dollar benefits dollar-linked instruments like U.S. Treasury bonds and multinational companies with global revenue streams.

2. Cyclical Equity Rally: The truce has sparked a rotation into cyclical sectors. Technology (XLK) and industrials (XLI)—which are highly exposed to global supply chains—have surged ahead of broader markets. Chipmakers like ASML (ASML) and logistics giants like Maersk (MAERSK) are prime beneficiaries of reduced trade barriers.

Strategic Uncertainties: The Risks Lurking Beneath

While the truce is a win for short-term momentum, three critical risks threaten to undermine its success:

1. Unresolved Structural Issues: The joint statement avoids specifics on China’s state subsidies, intellectual property theft, and the $1.2 trillion U.S. trade deficit. Without progress here, the truce could expire with tariffs back at 145%, triggering a market sell-off.
2. Fed Policy Tightening: The Federal Reserve has hinted at three more rate hikes in 2025 to combat inflation. A stronger dollar and higher rates could pressure emerging markets and tech stocks, which rely on cheap capital.
3. Supply Chain Fragility: Cargo shipments between the U.S. and China remain at pandemic-era lows, with no vessels arriving at major West Coast ports for 12-hour stretches. Even with tariffs cut, rebuilding trust and logistics could take years.

Investment Strategy: Balance Aggression with Hedging

To capitalize on the truce’s upside while mitigating downside risks, adopt a two-tiered approach:

Overweight Cyclical Sectors (Tech, Industrials)

• Tech: Focus on semiconductors (ASML, Applied Materials (AMAT)) and AI hardware (NVIDIA (NVDA))—industries reliant on cross-border trade.
• Industrials: Prioritize logistics firms (Maersk, CMA CGM) and shipbuilders (Fincantieri, Huntington Ingalls (HII)) benefiting from U.S. initiatives like the SHIPS for America Act.

Hedge with Dollar Exposure and Short-Term Treasuries

• Dollar-linked Instruments: Invest in USD-denominated emerging market bonds (e.g., iShares J.P. Morgan EM Local Currency Bond ETF (LEMB)) or inverse ETFs like ProShares UltraShort Euro (EUO) to profit from dollar strength.
• Treasuries for Volatility: Short-term U.S. Treasuries (2–3 year maturities) offer a buffer against Fed rate hikes and market pullbacks.

Avoid Unprotected Bets

• Steer clear of emerging markets equities (e.g., iShares MSCI Emerging Markets ETF (EEM)) and long-dated corporate bonds, which are vulnerable to rising rates and dollar volatility.

Conclusion: The Truce Is a Starting Line, Not a Finish Line

The 90-day truce has handed investors a tactical opportunity to buy into cyclical sectors and dollar exposure. But with structural disputes unresolved and the Fed’s tightening path uncertain, this is no time for complacency.

Act now, but act selectively. Overweight cyclicals and dollar plays, but hedge with Treasuries and FX volatility tools. The truce’s success hinges on the next 90 days—don’t let complacency blind you to the risks lurking beyond it.

Final Call to Action: Deploy 30% of your portfolio to tech/industrials, 40% to dollar-linked assets, and 30% to short-term Treasuries. Monitor the U.S.-China working group’s next meetings (likely July 2025) for clues on whether this truce will endure—or unravel.