LIVE MARKETS-Watching the negotiations

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WATCHING THE NEGOTIATIONS

While markets have somewhat stabilised after Trump's tariff pause, signalling an effective 90-day ceiling of a 10% tariff for countries ex-China, investors are now watching how negotiations will play out.

Japan is set to kick off negotiations today, while Italian PM Giorgia Meloni is scheduled in Washington on Thursday to discuss the EU's approach.

But the macro team at Citi emphasise that China is the key delta for markets in terms of trade negotiations, given the high bilateral level of tariffs.

As a reminder, China raised its tariffs on imports of U.S. goods to 125% on Friday in a retaliatory move to Trump, who effectively raised U.S. tariffs on Chinese goods to 145%, while pausing most planned levies on other countries.

"Our base case is that the reciprocal tariffs are negotiated down to effectively a ~10% baseline tariff plus 60% on China, with additional sectoral tariffs and some room for US company exemptions to be granted," Citi writes.

Under that scenario, Citi sees the S&P 500 .SPX at 5,800 at the end of the year, implying about 7.5% upside from current levels.

Their bear case assumes negotiations are less successful and retaliatory measures heat up, in which case there would be an increase in the effective tariff rate of 20-25 basis points and a more significant recession.

In that scenario, they believe the S&P could fall to 4,700, about 13% below yesterday's close.

The bull case sees the S&P rising to 6,400, up over 18%.

That scenario assumes successful negotiations of reciprocal tariffs down closer to around 5%, limited expansion of sectoral tariffs, more material de-escalation with China, and broader US company exemptions granted.

Reprinted with permission of Citi Research. Not to be reproduced.

(Samuel Indyk)

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