Trading the Trade Disruptions

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On Thursday May 8th, President Trump told Americans, “you better go out and buy stocks now. This country is going to be like a rocket ship.”

This morning, right on cue, stocks raced higher in reaction to the new trade deal between the U.S. and China.

The Nasdaq jumped 3.5% in trading early Monday, while the S&P 500 moved higher by 2.6%. These moves pushed American indexes back above the level they were at before President Trump’s “Liberation Day” tariff speech. The FXI China Large-Cap ETF rose 3%.

Meanwhile gold dropped 3% and miners corrected sharply. Oil rebounded by 3.5%.

President Trump hailed the negotiations as a “total reset” in relations between the two countries. In a joint statement, trade representatives stressed “the importance of a sustainable, long-term, and mutually beneficial economic and trade relationship“.

The two sides agreed to each drop tariffs by 115% for 90 days. America will drop levies in Chinese goods from 145% to 30%, while China will drop theirs from 125% to 10%.

Too Quick to Celebrate?

There’s no doubt this is a positive development.

It’s reassuring to see China and the U.S. talking directly at the highest levels. Treasury Secretary Scott Bessent will faithfully represent the interest of Americans.

However, there is a case to be made that investors are celebrating too early. Traders seem to be rushing back into U.S. tech companies, which is a risky move in this environment.

It looks like China is still playing hard ball with rare earth elements (REEs). Beijing controls up to 98% of certain critical minerals which are needed for semiconductors, weapons, and other high-tech products.

A Chinese source I follow on X reported the following, citing a government announcement, “China announced it will strengthen implementation of export control of critical minerals today.”

On our side, the U.S. continues to restrict sales of NVIDIA GPUs, critical for AI development, as well as ASML semiconductor manufacturing equipment to China.

I suspect that China may continue withholding rare earth elements until it gets relief on NVIDIA and ASML hardware.

And needless to say, the existing agreement is only a 90-day deal. That gives us time to negotiate a more permanent arrangement, but I suspect both sides still differ significantly on their expectations.

So while the threat of a “total break” between China and America has passed, that was never a realistic outcome.

Nevertheless, threats to U.S. tech stocks remain. NVIDIA may not be able to sell into China for much longer, and China’s restrictions on rare earth elements could eventually hurt semiconductor production. Additionally, there’s the looming threat of DeepSeek R2, as we covered last week.

There are more attractive ways to play the disruptions caused by the (ongoing) trade war than simply jumping back into the Mag 7.

Oil Opportunities

Escalating tensions between the world’s two largest economies caused the price of oil to fall sharply.

WTI crude oil has fallen from around $80 per barrel in mid-January to $62.50 today. This has caused a significant pullback in oil stocks. For example, Chevron (CVX) fell from $167 in late March to $140 today.

I recently bought an oil producer with a higher risk/reward than Chevron, Petrobras (PBR and PBR.A). Petrobras is Brazil’s partially state-owned oil company, which produces about 2.2 million barrels of oil per day and operates 8 refineries. Its shares have fallen from $17 at this time last year to around $12 today. That’s a 30% pullback, and the risk/reward looks attractive here.

If oil stays around current levels or higher, the dividend yield on Petrobras should be around 13% going forward. That kind of yield is worth taking a bit of risk on, even if there’s a chance it gets cut. Needless to say, this is a high risk, high reward investment.

Gold, Too

As we predicted last week in our The Empire Strikes Back mailing, gold is finally correcting. It’s down about 3% on the day, and I could see it retreating to around $3,000/oz or so.

Gold has had a breathtaking run this year. At one point it was literally a parabolic move. So it’s quite healthy to take a break here.

If the dip continues, it should prove to be an excellent buying opportunity in gold and silver miners. Gold miners like Barrick (B) continue to look incredibly cheap, but they might get cheaper if gold continues to correct. Spot silver will be tempting if we get a significant dip there, though none has materialized yet.

We’ll keep a close eye on the trade war and report back soon.

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