Asia stocks mostly higher as tariff truce supports sentiment

Asian equities largely advanced, with Japan's Nikkei and Australia's benchmark index reaching record highs, following the 90-day extension of the U.S.-China tariff truce. This tariff reprieve, largely anticipated, supported sentiment alongside expectations for Federal Reserve rate cuts and robust U.S. corporate earnings. While the truce maintains the trade status quo, investor attention is now shifting to critical upcoming economic data, specifically U.S. consumer price inflation, and central bank policy decisions, notably the Reserve Bank of Australia's widely expected interest rate cut.

Analysis

A 90-day extension of the U.S.-China tariff truce has supported overall positive sentiment in Asian markets, though the impact is uneven. This development, which was largely anticipated by the market, is seen as preserving the status quo rather than providing a new catalyst. The most significant market reactions were in Japan, where the Nikkei (.N225) surged 2% to a record high upon reopening after a holiday, and Australia, where the benchmark index (.AXJO) also hit a record ahead of an expected central bank rate cut. In contrast, Chinese blue-chips (.CSI300) were flat and Hong Kong's Hang Seng (.HSI) edged down 0.1%, indicating that the trade news is not providing a uniform lift and that domestic factors are influential. With the immediate trade risk deferred, investor focus is now pivoting to key macroeconomic data and monetary policy. The market is pricing in a 25 basis point rate cut from the Reserve Bank of Australia, making its forward guidance the key variable to watch. Globally, the upcoming U.S. consumer price inflation data is a critical test, with economists forecasting an acceleration in core CPI to 0.3% month-on-month. An upside surprise could challenge the market's current pricing of at least two Fed rate cuts in 2025 and J.P. Morgan's forecast for four successive cuts starting in September. In commodities, gold prices specifically reacted to trade policy, dropping 1.6% after the U.S. confirmed tariffs will not be applied to imported gold bars.

Key Decisions for Investors

• Given the tariff truce was widely expected, investors should shift focus from trade headlines to macroeconomic indicators, particularly the upcoming U.S. CPI data, as an inflation surprise could significantly reprice Fed rate cut expectations.
• Note the performance divergence in Asian equities; while Japan and Australia hit record highs on specific domestic factors, Chinese markets remain muted, suggesting a selective, country-specific approach to regional allocations is warranted over a broad risk-on trade.
• Monitor positions in interest-rate sensitive assets and commodities, as gold has already shown direct sensitivity to tariff specifics with a 1.6% drop, and oil prices face potential headline volatility from the upcoming U.S.-Russia summit.