Markets are underestimating the likelihood of a U.S.-China trade deal before the end of October, a move that would mark a temporary détente between the world’s two largest economies and extend the year’s risk rally, Jefferies strategist Christopher Wood said.
In his Oct. 16 edition of the Greed & Fear report, Wood said President Donald Trump’s tariff threats were more negotiation tactic than conviction, adding that Beijing could agree to limited concessions if Washington publicly disavows support for Taiwanese independence, a symbolic victory for China that would cost the U.S. little politically.
From tariffs to trade-offs
Wood said an “ultimate deal” scenario in which America lifts semiconductor export controls while China removes rare earth restrictions — a logical swap, given each side’s leverage. China holds a 92% market share in rare earth magnets vital to U.S. defense systems, while U.S. controls have accelerated Beijing’s push to build a domestic chip industry.
Trump isn’t a “national security zealot” and may privately agree with Nvidia (NVDA) Chief Executive Jensen Huang’s view that U.S. chip bans cost American tech firms their largest customer base, Wood said. Nvidia’s (NVDA) sales to China have plunged from 26% of revenue in 2022 to just 6% this year, according to Jefferies data.
Markets bet on a deal
Despite tariff noise, equity markets remain buoyant. Wood’s base case is that an October meeting between Trump and Xi Jinping leads to at least a partial deal, reducing China’s “uninvestable” stigma among U.S.-based fund managers.
Polls show 60% of Americans oppose the tariff agenda, Wood said, with farmers and consumers feeling the strain.
AI capex ‘mania’ still driving U.S. stocks
Wood continues to see AI infrastructure spending as the key driver of the U.S. equity melt-up, boosted by expectations of further Fed easing this year. The recent OpenAI-Broadcom (AVGO) (AVGO:CA) partnership, which will co-develop 10 gigawatts of custom AI chips, is the latest sign of escalating capital intensity.
“The growing discussion in the media of an ‘AI bubble’ is a sign that the peak may not yet have arrived in stock market terms,” Wood said. Hyperscalers are spending cash, not borrowing, though private credit and leveraged players are increasingly entering the fray, merging two areas of excess, he said.
Gold and the dollar: Tale of two declines
With gold (XAUUSD:CUR) trading above $4,200 per ounce, Wood revisits his longstanding target of $6,600, arguing that in real terms, the U.S. dollar has lost 99% of its value since 1971. Measured in gold, he said, the dollar is worth just 0.8% of its 1971 value, the true cost of abandoning the gold standard.
He remains structurally bearish on the dollar, citing rising fiscal stress. The U.S. Congressional Budget Office projects interest payments growing at 6.9% annually, far outpacing nominal GDP growth of 3.8%.
Australia: Recovery with a fragile base
The report’s final section turns to Australia, where easing inflation, falling rates and a housing rebound signal the end of the downturn. Real disposable income per capita has risen 2.4% from last year’s lows, while housing credit growth and net immigration continue to support consumption.
However, Wood warned that productivity is collapsing, and much of the jobs recovery is driven by the public sector. Corporate earnings remain weak, with MSCI Australia EPS growth averaging just 2.8% since 2017, though valuations are sustained by compulsory pension inflows and tax-free dividends.
Gold miners, up 113% year-to-date, remain the standout sector, but Wood pointed to their tiny 2.8% weighting in the MSCI Australia index, calling it a missed opportunity for mainstream managers.
Portfolio shifts
In line with the report’s themes, Greed & Fear raised exposure to Taiwan tech – TSMC (TSM), MediaTek (OTCPK:MDTK.F) — and Chinese internet giants – Alibaba (BABA), Tencent (OTCPK:TCEHY) (OTCPK:TCTZF), BYD (OTCPK:BYDDF) (OTCPK:BYDDY) — while trimming India’s weighting. AI momentum is undeniable, but the smartest move now is to own Asia’s hardware, not just America’s hype, according to the report.