• The recent 90-day U.S.-China trade truce follows months of aggressive tariff escalation, with markets showing signs of strain.
  • Hedge fund Elliott Management warns of potential capital flight from U.S. markets amid trade policy uncertainty.
  • Financial markets remain volatile, with the S&P 500 recovering some losses after the truce announcement.

Fragile Truce in Trade War

The U.S. and China reached a tentative 90-day trade agreement on May 12, 2025, temporarily halting further tariff increases after months of escalating trade tensions. The deal came as both economies showed signs of strain, with the U.S. facing potential capital flight and China grappling with rising unemployment and falling export orders.

Elliott Management, one of the world's largest activist hedge funds, has privately circulated analysis warning that prolonged trade uncertainty could trigger sustained capital outflows from U.S. markets. "When policy unpredictability reaches this level, global capital starts looking for safer harbors," said a person familiar with the firm's research.

Market Turbulence Persists

Financial markets have whipsawed through the trade conflict, with the S&P 500 losing 7.6% year-to-date before recovering some ground after the truce announcement. Treasury yields jumped 50 basis points during the height of tensions, while the dollar weakened significantly against the euro.

The Trump administration's trade policies included extraordinary measures - 145% tariffs on Chinese imports prompted 125% retaliatory tariffs from Beijing, creating what some economists called a "mutual embargo." Additional 25% tariffs on Mexican and Canadian goods further strained global supply chains.

"We're in uncharted territory," said a senior analyst at a major Wall Street bank who asked not to be named. "The system isn't built to handle tariffs at these levels for extended periods." Attempts to reach Treasury Department officials for comment were unsuccessful.

Long-Term Concerns

While markets initially rallied on news of the truce, economists warn the underlying disputes remain unresolved. The current 30% tariffs still in place continue to pressure consumers and businesses, with Harvard's Dani Rodrik noting they "will mainly hurt U.S. consumers."

Some analysts characterize current conditions as stagflation - with inflation accelerating even as growth slows. The most pessimistic scenarios suggest continued policy uncertainty could lead to a balance of payments crisis if capital flight accelerates.

For now, markets appear to be taking the truce at face value, but as one London-based hedge fund manager put it: "Everyone's waiting to see who blinks first when the 90 days are up."