Trump escalates tariff threats against China: How does it differ from April?

On October 10, U.S. stocks plummeted due to Trump's escalation of tariffs against China. Combined with the significant pullback in A-shares and Hong Kong stocks during the day on Friday, it seems that the volatility after the reciprocal tariffs in April has "reappeared."

After the reciprocal tariffs on April 2, the VIX index soared to 60, while it is currently at 21.7. The S&P 500 fell to the 120-week moving average at that time, which stabilized it; now the 120-week moving average corresponds to a level of 5420 (17% away from the current level), with previous key support levels at 6500 and 6200. The Hang Seng Index fell to the 250-day moving average and the 60-week moving average to stabilize, which now corresponds to around 22500 (14% away from the current level), with the next key support levels at 25700 and 24500.

Upon closer examination, several key differences can be found between the current situation and the reciprocal tariffs in early April.

► First, the level of surprise is different. After all, the market has gone through it once and has some psychological preparation, unlike April 2, which was a completely unexpected surprise; this is the biggest difference.

► Second, the scope is different. From the U.S. perspective, the last reciprocal tariffs targeted almost all global markets, while this time it mainly concerns China. Although the U.S.-China relationship is the most important, the scope is still different. Combined with the first point, this explains why yesterday's "triple kill" in stocks, bonds, and currencies, as well as volatility, is not as significant as in April; it is more about stock market sell-offs, with U.S. bonds and the dollar not being significantly affected.

► Third, the expectations for the future are different. After the last reciprocal tariffs, the market was completely "driving in the fog," not knowing how things would evolve. Although there are still many uncertainties this time, before the effective date on November 1, there is also the APEC meeting (October 31 - November 1), which may lead the market to adopt a wait-and-see approach. Trump subsequently indicated that he has not ruled out the possibility of a meeting.

► Fourth, the preparations and circumstances of both sides are also quite different. From the U.S. perspective, compared to early April, 1) so far, the U.S. has reached agreements with most markets except India, 2) a ceasefire in the Middle East seems to have been achieved, 3) the Federal Reserve has already cut interest rates and may continue to do so, 4) the Inflation Reduction Act has been passed, and 5) concerns about the AI bubble caused by DeepSeek's rise have dissipated. From China's perspective, both A-shares and H-shares have risen significantly and reached new highs, while the macroeconomic fundamentals have weakened again recently; however, overall expectations and preparations should be significantly stronger than in April.

► Fifth, the market positions are different. Both U.S. and Chinese markets have many unrealized gains, and valuations are higher than at that time, but the Chinese market is higher by more. U.S. stocks, especially the "Seven Sisters," have started to pull back since February when DeepSeek broke the U.S. AI monopoly. Currently, the valuation of the "Seven Sisters" is around 31 times, still lower than the peak of 33.7 at the end of last year and the beginning of this year, and 26.8 before the reciprocal tariffs in April, with a low of 23 after the sharp decline; the current valuation of leading Chinese technology and consumer stocks is around 20 times, higher than the peak of 18.8 before the reciprocal tariffs at the end of March, with a low of 14 times after the reciprocal tariffsThe overall index valuation is similar, with the standard S&P 500 index currently at 21 times earnings, compared to a peak of 22 at the end of last year, 20.5 times before the equivalent tariffs, and a low of 18 times after the equivalent tariffs; the Hang Seng Index is currently at 11.7 times, with a peak of 10.8 before the equivalent tariffs and a low of 8.8 times after the equivalent tariffs.

In summary, the fundamental influence on market trends still lies in the progress of tariff negotiations, especially how compromises are made before APEC and November 1st, which remains the core issue. After six months of negotiation and preparation, as mentioned in the fourth point above, both sides seem to have more preparation and even "confidence," which appears to be a risk of "escalation," but the market finds it difficult to make a definitive judgment.

From a market perspective, compared to early April, the relatively "unfavorable" aspect is the high level of unrealized gains and valuations, similar to the AI market of Hong Kong stocks before March, so the willingness to take profits and secure gains is higher, which may cause short-term volatility.

However, this is ultimately a short-term logic; the relative advantage is that the level of panic and preparation is better than it was then, and the trend of the AI industry in China and the U.S. is clearer, with U.S. monetary and fiscal policies gradually gaining momentum. Therefore, for a situation similar to the previous panic and volatility to occur, it would require the market to be certain that a compromise is completely hopeless.

Thus, our preliminary feeling is that short-term volatility caused by emotions may be difficult to avoid, but the market will closely observe the progress of negotiations before November. If investors have already reduced some positions as we previously suggested, they can wait and choose a better time to re-enter quality sectors at a lower cost. If investors have not reduced their positions, it may not be necessary to act at the very beginning of the most panicked time; they can wait for the panic to ease slightly and adjust as needed after a rebound.

Risk Warning and Disclaimer

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