Cooling trade tensions may prove temporary. How to prepare for more market flux.

A full reprieve from an all-out U.S.-China trade war may prove short lived, and we are cautious about whether the terms agreed to will guide the course of additional trade agreements between the United States and other countries. In our view, the U.K.-U.S. pact is also less informative, once you review the details. 

Once market exuberance fades, investors will continue to face a new, more restrictive U.S. trade policy, with material implications for markets. Below we review the two announced deals, and express our view of where investors could consider capital allocation in light of the announcements. 

ETFs in focus 

Fixed Income

BMO Short Corporate Bond Index ETF (ticker: ZCS)
BMO Target 2027 Canadian Corporate Bond ETF (ticker: ZXCO)
BMO Target 2028 Canadian Corporate Bond ETF (ticker: ZXCP)
BMO Target 2029 Canadian Corporate Bond ETF (ticker: ZXCQ)

Sectors

BMO Equal Weight Industrials Index ETF (ticker: ZIN)
BMO Equal Weight Utilities Index ETF (ticker: ZUT)
BMO Gold Bullion ETF (ticker: ZGLD)

International

BMO International Dividend ETF (ticker: ZDI)

Backdrop

After talks in Switzerland, the United States and China agree on May 12 to slash tariff rates by 115% for a period of 90 days. The U.S. will apply an average tariff rate of 30% on Chinese goods imports, and China will apply an average tariff rate of 10%. Notably, both sides have agreed to establish a trade consultation mechanism. 

Our take: Markets rallied on the news and there was an element of surprise in the percentages. Most expected an average U.S. tariff rate on Chinese goods being anywhere from 50-80% as part of any accord.

This is really about the Trump team trimming the extremes of trade policy rather than an outright removal of trade barriers. We expect the ensuing rallies to have relatively short shelf lives. True, this is a substantial​“climbdown” from April, but the offramp still leads the U.S. economy to a worse exit point than where it was heading into the year.

U.S.-U.K. trade announcement

This is largely a symbolic announcement. Does this establish a template for additional​“deals” between the U.S. and other countries? Probably not. 

For goods, the U.K. is the U.S.’ eighth-largest goods trading partner,¹ and one of the few countries that the U.S. actually runs a trading surplus against. Both countries are mostly net debtors to the rest of the world.

In short, it’s much easier for the U.K. to accept a 10% baseline tariff in exchange for concessions in a few sectors given that trade between the two countries isn’t as comprehensive. We couldn’t see Canada, the EU or China accepting something akin to this.

Overarching strategy?

Are there any hints of the overarching U.S. trade strategy? Yes.

The U.S. is willing to give on tariffs on steel/​aluminum – and to a degree on autos – in exchange for purchase agreements and increased market access for U.S. exporters. We suspect the degree of flexibility will depend upon who the U.S. is negotiating with. Are tariffs just a negotiating tactic then? Yes and no.

Trump is showing that he willing to cut some tariffs, but not give up on them completely. The U.S. is not removing the 10% tariff baseline while at the same time it’s keeping the reciprocal tariff at 10%. Remember that since the U.S. runs a goods trade surplus with the U.K., the latter only pays the 10% baseline tariff. That implies that countries that run a trade surplus with the U.S. should expect the floor to be 20% (baseline + reciprocal).

To put it bluntly — tariffs are here to stay and​“10% is new 0%.”

To distill the message further: markets have rallied primarily because Trump has been trimming the extremes of his trade policy. Not because the next level of U.S. economic prosperity has been unlocked.

Once the short-term excitement is over, this points to further consolidation and/​or downside risks until the Fed starts easing rates. And so far, the data doesn’t suggest that they should be in a hurry to do so. 

Portfolio strategy

The chart below shows the year-to-date gross inflows and outflows by our own ETF roadmap category. A few interesting observations to make here:

• First, the large amount of flows to the ultra-short category tells us that clients have been prioritizing liquidity amidst the heavy degree of macroeconomic volatility.
• Second, flows into corporate bond ETFs are surprising until we note that most of this has been in short corporates (or ZCS).
• Third, we’ve seen a pick-up in interest for global and emerging market equity tracking funds.
• Finally, investors have exited overweight positions in funds that track U.S. equities.

To us, the flow out of ultra short-term funds is a risk to watch for. Markets have rallied primarily because Trump is trimming the extremes of his trade policy – but we’d caution against buying into further rallies based on​“trade deals” like the U.S./U.K. agreement.

For investors looking to continue to prioritize liquid positions as well as capital preservation, the tickers below could be considered: 

Fixed Income

BMO Short Corporate Bond Index ETF (ticker: ZCS)
BMO Target 2027 Canadian Corporate Bond ETF (ticker: ZXCO)
BMO Target 2028 Canadian Corporate Bond ETF (ticker: ZXCP)
BMO Target 2029 Canadian Corporate Bond ETF (ticker: ZXCQ)
BMO AAA CLO ETF - Hedged Units (ticker: ZAAA.F)

Largest year-to-date flows into BMO ETFs (by roadmap category)

As for where a portion of those flows go? We suspect it’ll be recycled into the EAFE space – not least as markets become more tuned into the reality that while Trump may be moderating a bit on tariffs, they won’t be going away completely. It is this point that we expect to support the EAFE > U.S. even more in the period ahead.

International

BMO International Dividend ETF (ticker: ZDI)

Other funds and strategies that we continue to like…

• Industrials (as a sector). Our own ZIN has performed fairly well over the past few weeks and we suspect this is due to expectations of fiscal stimulus here in Canada. It still feels like this theme has more room to run.
• Utilities (covered call). ZUT provides decent yield and some shelter from trade-related risks given its exposure to Canadian and U.S. names.
• Gold + miners. This is a clarion call for ZGLD, and ZJG more than anything.

Sectors

BMO Equal Weight Industrials Index ETF (ticker: ZIN)
BMO Equal Weight Utilities Index ETF (ticker: ZUT)
BMO Gold Bullion ETF (ticker: ZGLD)
BMO Junior Gold Index ETF (ticker: ZJG)

Performance (%)

Bloomberg, as of April 30, 2025. Inception date for ZCS = October 20, 2009, ZDI = November 5, 2014, ZIN = November 14, 2012, ZUT = January 19, 2010, ZGLD = March 4, 2024, ZJG = January 19, 2010.

¹ Bloomberg, as of April 30, 2025.