This week, global markets have been transfixed by the announcement of a new trade framework between the United States (US) and China. The agreement, struck after marathon negotiations in London, is now awaiting the final signatures of the respective countries’ presidents, President Donald Trump and President Xi Jinping. While it promises to ease the flow of sensitive goods – most notably rare earth minerals and, to a lesser extent, semiconductors – the details remain shrouded in ambiguity, leaving investors and industry leaders cautious.
What’s in the framework?
At its core, the framework seeks to defuse escalating tensions that have seen tit-for-tat tariffs and export controls disrupt global supply chains. Key elements include:
- Rare earth minerals: China has agreed to resume exports of rare earth elements and magnets to the US, reversing the export restrictions imposed in April in response to steep US tariffs. These minerals are indispensable for US industries, especially automotive, electronics, defence, and renewable energy.
- Tariff reductions: The US will lower tariffs on Chinese goods to 55% (from a peak of 145%), while China will cut its tariffs on US imports to 10% (down from 125%).
- Semiconductors and technology: The US will relax some restrictions on semiconductor design tools and software exports to China in reciprocation for China easing rare earth export curbs.
- Student visas: The US will also allow Chinese students to attend American universities, a concession that, while symbolic, helps thaw broader diplomatic relations.
Despite these headline commitments, the agreement is only a framework, with details on implementation, enforcement, and specific quotas being notably absent. Both sides have a 90-day window to finalise terms, with the threat of tariffs snapping back if talks falter.
WHY RARE EARTHS AND SEMICONDUCTORS MATTER
Rare earths: the hidden backbone
Rare earth elements, a group of 17 metals, are essential for manufacturing everything from electric vehicle motors and wind turbines to smartphones, advanced weaponry and satellites. China dominates this market, producing 60% of global supply and processing nearly 90% of all rare earths. This monopoly gives Beijing enormous leverage – when it restricted exports to the US in April, US manufacturers faced immediate shortages, with some automakers and electronics firms forced to halt production.
The US – despite having some reserves (notably at Mountain Pass, California) – lacks the processing infrastructure to turn raw ore into usable materials at scale. Until recently, even US-mined rare earths were shipped to China for separation and refinement. The supply crunch underscored just how vulnerable American industry is to geopolitical shocks in this sector.
Semiconductors: the brains of modern technology
Semiconductors are the foundation of all modern electronics. The US leads in chip design and some advanced manufacturing, but China has invested heavily to close the gap. US export controls, especially on cutting-edge chip technology and design software, have been a major point of contention. For China, access to these tools is vital for its ambitions in artificial intelligence (AI), telecommunications, and military modernisation.
Conversely, the US needs a stable supply of rare earths for its own semiconductor fabrication, as these materials are critical for chip manufacturing equipment and high-performance electronics. Any disruption in the flow of rare earths or chips can ripple through global supply chains, affecting everything from consumer goods to national security systems.
Market response: relief, but with a dose of scepticism
The immediate reaction in equity markets was positive, with major indices seeing moderate gains on hopes of supply chain stabilisation and lower input costs. Automakers and electronics firms, in particular, welcomed the prospect of resumed rare earth shipments. However, the optimism is tempered by several unresolved issues:
- Lack of detail: The agreement is long on promises but short on specifics. Key questions, such as how much rare earth China will actually export, or which semiconductor tools will be cleared for sale, remain unanswered.
- Temporary nature: The 90-day truce is just that – a pause, not a permanent fix. Both sides retain the ability to reimpose tariffs or export controls if talks break down.
- Structural dependence: The US remains heavily reliant on China for rare earth processing. Building alternative supply chains will take years, even with new investments in domestic mining and refining.
Why this agreement matters for the future
The stakes could hardly be higher. The last major semiconductor shortage cost the auto industry, alone, more than 17 million vehicles in lost production between 2021 and 2023. A similar disruption in rare earths could cripple not just car, but also defence, energy, and high-tech manufacturing.
For the US, ensuring access to rare earths is about more than economics – it’s a matter of national security. For China, maintaining access to advanced semiconductors is critical for technological self-sufficiency and continued economic growth.
The current framework, while fragile, buys both sides time. It signals a willingness to negotiate and, perhaps, to avoid the worst-case scenario of a full-scale trade war. But unless deeper, structural changes are made, such as diversifying supply chains and clarifying trade rules, the risk of future disruptions will persist.
The US-China trade framework on rare earths and semiconductors is a necessary, if tentative, step toward stabilising global supply chains. But with so much left unresolved, the market’s caution is well founded. This story is far from over, and its outcome will shape the future of technology, industry, and geopolitics for years to come.
TURNING TO THE MARKETS
The week’s key themes:
- Middle East military tensions drive US market concerns
- US Treasury market experiences significant movement
- Oil prices reach four-month highs
- The US Dollar Index stages a sharp rebound
Indices
American stock market futures dropped significantly in early trade on Friday, falling over 1% across all major indices. This decline occurred after Israel conducted a surprise overnight military attack against Iran, marking a serious escalation in Middle Eastern tensions. Israel’s Defence Minister announced an emergency status, cautioning that missile and drone attacks against Israeli territory and civilians were imminent. American government officials clarified that the United States played no part in this military operation.
Investors are also closely watching the upcoming University of Michigan consumer confidence survey for June, which will reveal how American families are handling the ongoing trade disputes. Recent US inflation data came in lower than economists predicted, strengthening beliefs that the US Federal Reserve (Fed) will reduce interest rates multiple times this year. Meanwhile, luxury furniture company, RH, saw its stock price jump 20% after market hours due to better-than-expected quarterly results.
British markets reached new heights with the United Kingdom’s (UK’s) leading indicator, the FTSE 100, climbing 0.2% to 8,880 points. The UK’s economic weakness, including a 0.3% GDP decline in April, has helped stock prices as investors expect further rate cuts this year. Energy companies like Shell and BP performed well, alongside pharmaceutical giants and retailer, Tesco. However, German markets struggled with Germany’s DAX falling 0.7% for the fifth consecutive day, hurt by trade tensions and geopolitical concerns.
Bonds
On Thursday, the US 10-year Treasury note’s yield fell by nearly six basis points to reach 4.36%. This decline represents the second consecutive day of falling yields as investors flock to safe haven assets, driven by renewed geopolitical tension, trade tensions and lower US inflation.
Even before Israel’s attack on Iran, Iran had issued threats against American military installations, warning of potential strikes if ongoing nuclear negotiations collapse. This week President Trump also implemented new trade policies, which will be announced within the next two weeks, when the administration plans to send official letters to major trading partners outlining specific tariff rates designed to force these countries into revised trade agreements. This approach is concerning for markets as the US is implementing a unilateral strategy where nations must either accept the proposed terms or face economic consequences. Recent US economic data, showing lower-than-anticipated consumer and producer price increases, has strengthened investor confidence that the Fed will reduce interest rates twice before the year concludes – lower rates mean lower returns for investors.
Financial markets are closely monitoring today’s 30-year bond auction, which will reveal investor appetite for longer-term US-government debt. Wednesday’s auction of 10-year Treasury notes, worth $39 billion, demonstrated robust demand from buyers.
British government bonds, known as Gilts, saw their 10-year yields fall to 4.538%, reaching their lowest level in five weeks. This decline followed disappointing economic data showing the UK economy contracted by 0.3% in April, with the decline being larger than initially expected. The poor economic performance has increased speculation about potential Bank of England (BoE) interest rate cuts, despite officials likely maintaining current rates at next week’s policy meeting.
German government bonds also experienced yield declines, with 10-year Bund rates approaching 2.5%, nearing their lowest levels since early May. European investors sought these safe haven investments amid growing Middle Eastern tensions and renewed trade war concerns.
In South Africa, the 10-year government bond yield decreased to 10.09% on Thursday, representing a modest 0.02% decline from the previous trading session.
Commodities
Brent crude oil, the global benchmark for petroleum prices, jumped dramatically to approximately $76/barrel this morning, marking its strongest level since February. This sharp increase occurred following Israel’s surprise military attack on Iran overnight, which has created serious concerns about potential oil supply interruptions across the global market. The situation escalated when Israel announced a state of emergency, indicating that Iranian retaliation against Israeli locations could happen soon. This development has raised fears about a wider regional war that could affect the Strait of Hormuz, a critical waterway that handles roughly one-fifth of the world’s oil transportation. Supporting oil’s price surge, recent data from the Energy Information Administration revealed that American crude oil reserves dropped more significantly than analysts predicted, demonstrating robust energy demand. Additionally, recent inflation figures came in lower than expected, strengthening predictions that the Fed will reduce interest rates by September, which could stimulate economic activity and increase oil consumption.
Gold prices experienced a substantial rally, climbing over 1% to surpass $3,440/ounce in early hours of this morning, nearing all-time highs as investors seek safe haven assets. The precious metal’s surge directly followed Israel’s military action against Iran, with Israeli Prime Minister Benjamin Netanyahu confirming that the strikes targeted Iran’s nuclear facilities while acknowledging Iran’s continued ability to respond. Beyond the Middle Eastern conflict, gold received additional support from uncertainty surrounding American trade policies. President Trump’s threats to implement unilateral tariffs on trading partners created further market anxiety, though US Treasury Secretary, Scott Bessent, suggested the current 90-day tariff suspension might be extended.
Currencies
The US Dollar Index staged a sharp rebound in early trade, climbing above 98 after hitting a three-year low just a day earlier. This turnaround was driven by investors seeking safety following Israel’s strike on Iran’s nuclear sites, which heightened global tensions. US officials clarified that America had no role in the attack. Before this, the dollar had been under heavy pressure due to President Trump’s aggressive trade threats and weaker-than-expected inflation, which increased expectations for Fed rate cuts.
Meanwhile, the euro surged to $1.16/€ – its highest level since late 2021 – as investors responded to diverging central bank policies and renewed fears over trade wars. The European Central Bank signalled a pause in rate cuts, while the Fed is expected to start cutting rates as soon as September, making European assets more attractive, as higher rates mean better returns on cash.
The British pound stayed near $1.35/£, close to a three-year high, benefitting from the weaker dollar. However, the UK’s economy showed signs of strain, with GDP shrinking by 0.3% in April, driven by higher living costs and taxes. Despite this, the BoE is expected to keep rates steady, while the UK government announced a major spending plan.
The rand saw significant pressure during trade on Thursday/early this morning, coming off its recent highs and recent sideways trade. The weakness in the rand is largely driven by the rebound in the dollar, while increased geopolitical tension and renewed trade tensions drove flight to safe haven assets.
*Please note that all market information and data is at the time of writing.
Key indicators:
USD/ZAR: 17.91
EUR/ZAR: 20.67
GBP/ZAR: 24.30
GOLD: $3,452
BRENT CRUDE: $74
Sources: Bloomberg, Reuters, LSEG Workspace and Trading economics.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.