TSX Rallies as Sino-US Trade Tensions Show Signs of Easing

The Toronto Stock Exchange (TSX) has seen notable gains in recent weeks, driven by emerging signals of de-escalation in the protracted Sino-US trade conflict. After years of tariff wars, supply chain disruptions, and geopolitical posturing, both nations have begun implementing targeted exemptions and engaging in tentative negotiations. These developments have alleviated fears of a full-blown trade collapse, boosting investor confidence in Canadian equities tied to global trade. Below, we analyze the key drivers of this shift and its implications for TSX investors.

Background: The Trade War’s Toll on the TSX

The Sino-US trade conflict, marked by escalating tariffs and retaliatory measures, had severely impacted Canadian markets since 2025. Key sectors like energy, materials, and manufacturing faced headwinds due to:
- Commodity Price Volatility: China’s economic slowdown reduced demand for Canadian oil, metals, and agricultural goods.
- Supply Chain Disruptions: US tariffs on Chinese imports (e.g., solar panels, semiconductors) forced Canadian firms to navigate fragmented supply chains, raising costs.
- Market Uncertainty: Investors delayed capital allocation in trade-exposed sectors, leading to underperformance in TSX-listed equities.

By April 2025, the TSX had declined sharply amid fears of a global recession. However, recent developments suggest a turning point.

Signs of Easing Tensions: Key Developments

1. China’s Selective Tariff Exemptions
   Beijing has granted exemptions to certain US goods, including:
2. Ethane Imports: A critical petrochemical feedstock, exempted from China’s 125% retaliatory tariffs. This benefits Canadian companies like Enterprise Products Partners (US) and Sinopec (China), which rely on stable trade flows.

3. Semiconductors and Pharmaceuticals: Exemptions for these sectors aim to protect domestic supply chains, signaling a pragmatic approach to mitigating economic pain.

4. US Tariff Adjustments
   The Biden administration introduced exemptions for the automotive sector, clarifying that companies paying tariffs on imported vehicles would not face additional levies on components. This eased pressure on firms like Toyota (TM) and General Motors (GM), indirectly benefiting Canadian auto parts suppliers.

5. Talks and Precedents
   While formal agreements remain elusive, both sides have signaled flexibility:

6. China’s Commerce Ministry stated it is “evaluating” US proposals for negotiations.
7. The US has delayed further tariff hikes and signaled openness to phased reductions if Beijing reciprocates.

TSX Sector-by-Sector Impact

The TSX’s recovery is most pronounced in sectors directly tied to global trade and commodities:

1. Energy Sector
2. Gains: The TSX Energy Index rose 8.5% in May, outperforming broader markets.

3. Why: Reduced tariffs on ethane and other petrochemicals have stabilized prices for Canadian oil and gas producers. Exemptions also alleviate fears of Chinese demand collapse.

4. Materials and Mining

5. Gains: The Materials sector surged 6.2%, as fears of a commodity supercycle slowdown ease.

6. Why: Improved China-US trade flows reduce uncertainty for miners like Barrick Gold (GOLD) and Teck Resources (TECK), which export to Asia.

7. Technology and Manufacturing

8. Gains: Tech stocks, including Shopify (SHOP) and Lululemon (LULU), rose 4–5%, as supply chain bottlenecks ease.
9. Why: US exemptions for semiconductors and components reduce production costs for Canadian manufacturers.

Risks and Uncertainties

While the TSX’s rally is encouraging, risks persist:
- Tariff Volatility: Both nations continue to use tariffs as leverage. A breakdown in talks could reignite tensions.
- Geopolitical Risks: China’s demands for full tariff removal before negotiations remain unresolved.
- Global Recession Fears: Even with easing trade tensions, the IMF projects global growth at 2.8% in 2025—a level that could still pressure commodity prices.

Conclusion: TSX Outperformance Likely to Continue, but Caution Advised

The TSX’s recent gains reflect a critical shift in the Sino-US trade dynamic, with both sides adopting a more pragmatic approach to avoid mutual harm. Key data points reinforce this narrative:
- TSX Performance: The index rose 5.4% in April and 3.1% in May, outperforming the S&P 500 by 200 basis points during the same period.
- Sector Strength: Energy and materials stocks have led the recovery, with ethane-related equities like Enterprise Products Partners up 12% since April.
- Market Sentiment: The CBOE Volatility Index (VIX) fell to 18 in May from 28 in March, signaling reduced investor anxiety.

Investors should prioritize trade-exposed sectors like energy and materials, while maintaining caution in tech and industrials until broader tariff agreements materialize.

Final Takeaway: The TSX’s rally reflects a nascent thaw in Sino-US trade relations, but sustained gains will require tangible progress on tariff reductions. For now, the path of least resistance is upward—but geopolitical clouds linger.

This analysis underscores the TSX’s resilience amid global headwinds, offering opportunities for investors who balance optimism with risk management.