After a week of turbulent trading, global markets staged a sharp rally last Thursday on hopes that President Trump would soften his aggressive tariff stance. The Nasdaq soared over 10% on the day, logging its best performance since 2008, while the S&P 500 and Dow rocketed higher by around 8% each. The catalyst was news that Trump would grant temporary exemptions on certain key products from China like smartphones, laptops and electronic components.

The rally marked a sharp turnaround from earlier in the week, when escalating trade tensions and rising recession fears had weighed heavily on markets. Sentiment had deteriorated significantly, following China's announcement of retaliatory tariffs of up to 225% and a Bank of America survey showing fund managers at their most cautious in three decades. However, as reports emerged that President Trump was engaging with corporate leaders and potentially open to compromise, investor confidence quickly rebounded.

Tech stocks led the charge higher amid relief that supply chains would be spared the worst disruptions. Apple, which had warned the tariffs could force widespread product price hikes, saw its shares surge over 6%. Industrials and automakers also soared on reports that duties on car parts could be rolled back. Ford and GM both jumped around 4%.

The buoyant mood spilled over into global markets. European indices notched their best day in months, with Germany's DAX up 4.5% and France's CAC gaining nearly 3%. Even emerging markets caught a bid despite their sensitivity to trade risks. China's yuan strengthened and the MSCI EM equity index rallied 2%.

However, the optimism faded almost as quickly as it arrived. By Friday, U.S. markets had given back a chunk of the prior session's gains as the limits of the tariff exemptions became apparent. Investors grew warier that a full-fledged deal with China remained distant, after Beijing suspended all orders of Boeing aircraft. Safe havens like bonds and gold caught bids, while oil prices slumped back toward $60/barrel.

The sheer velocity of the market moves underscores the make-or-break importance of trade developments on the global growth outlook. With economic data deteriorating and corporate earnings season set to commence, further tariff escalation could jeopardise the fragile market recovery. Conversely, any signs of real diplomatic progress would likely fuel an explosive rally.

Against this backdrop, two broad scenarios are beginning to take shape:

1.The ‘De-globalisation Scenario’ 

In this scenario, the tariffs mark a long-term ideological shift — aiming to reduce the U.S. trade deficit and revive domestic manufacturing. Sustained duties and fragmented supply chains could weigh on U.S. productivity and growth. However, this may accelerate trade integration within Asia and Europe. While China may face short-term disruption, it could adapt by deepening regional ties. Commodity-exporting nations like Australia may find selective advantages amid the realignment.

2.The ‘Art of the Deal’ Scenario

A more optimistic interpretation is that the tariffs are a high-stakes negotiating tactic. If the U.S. and China reach a compromise — even one with modest concessions — it could help restore trade flows, ease supply chain tensions, and boost global business confidence. While still disruptive, this outcome would be far less damaging than a prolonged decoupling between the world’s two largest economies.

For now, markets remain highly sensitive to each policy twist. While Thursday’s surge highlighted the upside potential if trade tensions ease, it may take more substantive breakthroughs to steady sentiment. In the coming days, investors will be watching closely for new signals from the Trump administration — and signs of how the tariffs are affecting inflation, growth, and corporate confidence.