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The US and China are opening a second round of trade talks in London today after US President Trump and China's President Xi spoke over the phone last week. Trump said after the call that the US is “in very good shape with China and the trade deal.” Ahead of the talks, Beijing granted approval to some applications for the export of rare earths, while Boeing began shipping commercial jets to China for the first time since early April.

US equities on Friday were also boosted by a May labor report that beat prior expectations. Headline nonfarm payrolls increased by 139,000 last month, beating consensus forecasts, while the unemployment rate was steady at 4.2%. The S&P 500 gained 1% to stand above 6,000 for the first time since February, and the 10-year Treasury yield rose 11 basis points to 4.51%.

However, we think market volatility remains likely in the near term as investors watch for further tariff, economic, and fiscal risks.

US tariffs are likely to remain high despite potential agreements ahead of the July deadline and recent legal challenges. Efforts to deescalate US-China tensions are welcome, but a comprehensive agreement will likely take time. Investors will also be looking for concrete steps toward reaching lasting deals with other trading partners. Overall, we do not think it is in the interest of the Trump administration for US tariff rates to return to levels announced on "Liberation Day", given the potential economic damage they would cause to the US. A collapse in trade would also undermine the country’s need for a predictable revenue stream to finance an expansive legislative agenda. However, the effective tariff rate should end the year around where it stands now at roughly 15%, which would still be six times higher than the 2.5% rate at the start of the year. In our view, the Court of International Trade’s ruling to halt the tariffs levied under the International Emergency Economic Powers Act (IEEPA) of 1977 would ultimately be upheld by the Supreme Court, but these levies will likely reappear in other forms. Tariffs on critical products are also likely forthcoming, to be levied under Section 232 of the Trade Expansion Act of 1962 on national security grounds.

US economic activity has shown signs of softening amid mixed data. While the growth in nonfarm payrolls was stronger than market expectations, details of the labor report were more mixed. There were downward revisions totaling 95,000 for the prior two months, and the household survey was relatively weak. We think the US labor market remains balanced for now, with moderately rising payrolls and wages providing households with income growth that is helping to sustain consumption spending. But we expect to see further softening in the second half of 2025 as tariffs and other policy measures weigh more heavily on the economy, leading the Federal Reserve to resume cutting interest rates in September.

Worries over the US fiscal outlook could drive yield volatility. The "One, Big, Beautiful Bill Act" (OBBBA) is currently under review by the US Senate following its passage in the House last month. Recent headlines suggest that contentious debates are likely, and the Senate will probably make some modifications to the bill. While we think it is unlikely that changes would substantively alter either the potential fiscal impulse in 2026 or the longer-term deficit outlook, media attention on the US fiscal outlook is likely to trigger bouts of Treasury yield volatility. Markets will also be watching closely the USD 22bn auction of 30-year government bonds this week to gauge investor appetite for US debt, while additional details on OBBBA tax provisions that target “discriminatory” tax policies in several OECD countries could lead to potential market swings.

So, the potential for market swings continues. But in our view, this should not impede investors putting cash to work, especially given our continued expectation for US equity gains over 12 months and that both interest rates and cash returns are set to fall as the year progresses. For under-allocated investors, we recommend phasing into equities or balanced portfolios to manage near-term uncertainty while building long-term wealth-creation potential.

Investors seeking to shield portfolios from volatility should also hold sufficient exposure to medium-duration high-quality government and investment bonds, which are likely to perform especially well in adverse growth scenarios. Investors looking beyond pure financial risk-return ideas and keen to diversify political risks can consider an allocation to gold, with CIO maintaining its long-term price forecast of USD 3,500/oz by next June.

Furthermore, as both US equity and US high-quality bond returns have recently moved in tandem during market volatility, we also see potential merit in the use of alternative investments like hedge funds for uncorrelated sources of return, potential volatility dampening and portfolio diversification, and as a means to exploit potential mispricing across asset classes. That said, investors should be willing and able to bear the unique risks of investing in alternatives, including but not limited to greater difficulty in selling them in stressed financial markets (also known as illiquidity).