Policy Uncertainty Fuels Rise in U.S. Government Debt Hedging

The explosions in Amritsar - the first heard in the three-day-old conflict between the nuclear-armed neighbours - could mark a further expansion in the hostilities that have alarmed world powers.

Projectiles and flashes were seen in the night sky above the Indian Kashmir city of Jammu that was plunged into a blackout in the second night of blasts in the region's winter capital, officials and a Reuters journalist said.

"Drones have been sighted ... They are being engaged," said an Indian military official who asked not to be named.

Ten blasts were heard near the airport in the Indian Kashmir city of Srinagar and there were explosions in a dozen other locations in the contested region, other security officials added.

There was no immediate comment from Pakistan which dismissed Indian accusations that it had launched attacks on the same area on Thursday night.

The old foes have been clashing since India struck several areas that it described as "terrorist infrastructure" in Pakistan on Wednesday in retaliation for a deadly attack on Hindu tourists in Indian Kashmir last month.

Pakistan dismissed Indian accusations that it was involved. Both countries have exchanged cross-border fire and shelling and sent drones and missiles into each other's airspace.

Around 48 people have been killed since Wednesday, according to casualty estimates on both sides of the border that have not been independently verified.

Tourists and villagers fled border zones, residents rushed to stockpile food and people were told to stay indoors in cities in Kashmir and beyond. India's cricket board on Friday suspended the IPL - the sport's richest tournament - and the Pakistan Super League postponed its remaining eight matches.

The relationship between India and Pakistan has been fraught with tension since they gained independence from colonial Britain in 1947. The countries have fought three wars, two of them over Kashmir, and clashed many times.

CLASHING ACCUSATIONS

Item 1 of 4 A man uses his mobile phone to film debris of shops damaged by cross-border shelling in Lagama village near the Line of Control (LoC) between India and Pakistan, in Indian Kashmir's Baramulla district, May 9, 2025. REUTERS/Stringer

[1/4]A man uses his mobile phone to film debris of shops damaged by cross-border shelling in Lagama village near the Line of Control (LoC) between India and Pakistan, in Indian Kashmir's Baramulla district, May 9, 2025. REUTERS/Stringer Purchase Licensing Rights, opens new tab

India's airforce earlier said Pakistan used Turkish drones to attack 36 locations on India's west and northwest, in Kashmir and further afield in states bordering Pakistan all the way to the edge of the Arabian Sea on Thursday night into Friday morning.

India responded with drones on targets in Pakistan and destroyed one air defence system, Indian Air Force officer Vyomika Singh told a media briefing.

Pakistan Information Minister Attaullah Tarar had dismissed earlier Indian accusations of Pakistani attacks as "baseless and misleading" and said Pakistan had not carried out any "offensive actions".

In Pakistani Kashmir, officials said heavy shelling from across the border killed five civilians, including an infant, and wounded 29 others in the early hours of Friday.

The fighting is the deadliest since a limited conflict between the two countries in Kashmir's Kargil region in 1999.

Sirens had blared for more than two hours earlier on Friday in in Amritsar, which houses the Golden Temple revered by Sikhs.

Tourists fled the city by road as the airport was closed.

"We really wanted to stay but the loud sounds, sirens, and blackouts are giving us sleepless nights. Our families back home are worried for us so we have booked a cab and are leaving," said a British national who did not want to be named.

Schools and coaching centres were closed in the Bikaner region of India's desert state of Rajasthan, and residents near the Pakistan border said they were asked to move further away and consider moving in with relatives or using accommodation arranged by the government.

Further south in Bhuj in Gujarat, authorities said tourist buses had been kept on standby in case they needed to evacuate people near the Pakistan border.

India's Directorate General of Shipping directed all ports, terminals and shipyards to increase security, amid "growing concerns regarding potential threats".

Indian shares fell for a second straight session on Friday, losing about $83 billion in market value, with both key stock indexes losing 1.1%.

Pakistan's benchmark share index (.KSE), opens new tab closed 3.52% higher with traders crediting a fall off in violence in Pakistani territory after Thursday's clashes.

Reporting by Aftab Ahmed in Jammu, Charlotte Greenfield, Gibran Naiyyar Peshimam and Asif Shahzad in Islamabad, Saurabh Sharma in Amritsar, Rupam Jain in New Delhi, Ariba Shahid in Karachi, Fayaz Bukhari in Srinagar,; Additional reporting by Nilutpal Timsina in Bengaluru; Writing by Sakshi Dayal and YP Rajesh; Editing by Jacqueline Wong, Raju Gopalakrishnan and Andrew Heavens

Source: Reuters

Source: Reuters

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TRICKY TRADE-OFFS

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The United States and its European allies are finalising a proposal for a 30-day ceasefire in Ukraine that if refused would see them jointly impose new sanctions on Russia, a French diplomatic source said on Friday.

U.S. President Donald Trump called on Thursday for a 30-day unconditional ceasefire between Russia and Ukraine, warning that Washington and its partners would impose further sanctions if the ceasefire was not respected.

Ukraine has expressed readiness to accept the U.S. proposal. Russia has unilaterally declared a three-day ceasefire running from May 8-10 to coincide with the 80th anniversary of the end of World War Two.

"We're not completely with a finalised project, but we hope that we're at a moment of convergence," said the diplomatic source, speaking on condition of anonymity.

"What could happen in the coming hours and days, there could be an announcement of a ceasefire either of 30 days or compartmentalized, which is still being discussed."

The source said there were still discussions on whether to announce a unilateral ceasefire or to give a short response time to Russia, although if it refused then new American and EU sanctions would be imposed on Moscow.

The two sides are coordinating on the sanctions packages.

French Foreign Minister Jean-Noel Barrot, who was in Washington last week to meet U.S. Secretary of State Marco Rubio, will join President Emmanuel Macron in Kyiv on Saturday, where there will be a hybrid meeting of Ukraine's closest allies and discussions on the U.S.-European proposal.

The source said political and technical talks between Europe and the U.S. had stepped up since last week. Trump and Macron spoke on Thursday to discuss the ceasefire proposal.

"We felt in the discussions with the Americans a certain irritation towards the Russian posture, the lack of reactivity and seriousness in its responses to what was proposed before," the source said. "The decision is practically taken."

Source: Reuters

Almost $700 billion of goods are now exchanged between the two nations each year. In an effort to preserve some of that relationship, US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer are due to begin negotiations with Chinese officials, led by Vice Premier He Lifeng, in Switzerland on May 10. They are the first confirmed trade talks between the two superpowers since the latest tariffs went into effect.

If a deal to deescalate the trade war isn’t reached, the economic fallout could be profound. Chinese manufacturing activity has slowed, partly as demand from the world’s biggest consumer market dwindles, and many of the country’s exporters are making plans to turn to other regions. The steeper duties are driving up prices for American consumers on products as varied as umbrellas, batteries, and refrigerators, as companies work out how to rejig their supply chains to minimize their tariff bill.

In 2000, as China prepared to join the World Trade Organization, the US granted it “permanent normal trading relations” status, meaning it received equal tariff treatment with other trading partners. This kickstarted rapid growth in US-China trade.

Companies in the US and elsewhere began shifting a substantial amount of production to the Asian nation. This hollowed out some domestic American industries in a process later dubbed the “China shock.” But it helped bring down the price of consumer goods at home as China became the world’s factory.

By 2024, the total value of imports and exports between the US and China was almost nine times higher than in 2001. While Trump’s first trade war put a dent in the relationship, the Covid-19 pandemic sparked a resurgence and Chinese exports to the US hit a record in 2022.

Last year, the three biggest US imports from China were smartphones, laptops and lithium-ion batteries, while liquid petroleum gas, oil, soybeans, gas turbines, and machines to make semiconductors were some of the most valuable US exports to China.

Apple Inc. is one of the US firms that reoriented its supply chain over the past two-and-a-half decades, now contracting much of its manufacturing to firms in mainland China. Until recently, almost all iPhones were made in a few huge factories there — largely by Hon Hai Precision Industry Co., better known as Foxconn — using parts from South Korea, Taiwan, Japan, China, the US and elsewhere.

The California-based tech giant is far from the only company that took advantage of China’s deep supply chains and lower costs. More than 70% of the $56 billion of smartphones imported into the US last year were from China, according to Bloomberg analysis of trade data from the US International Trade Commission. Meanwhile, almost 90% of games consoles brought in from overseas by the likes of Sony Group Corp., Microsoft Corp. and Nintendo Co. Ltd were shipped from China too.

Trump kicked off the trade war during his first term with a series of tariffs on Chinese imports, including a 25% tax on steel and a 10% tax on aluminum, and called China’s trade relationship with the US “the greatest theft in the history of the world.” His successor, President Joe Biden, kept most of the tariffs in place, added some new ones, and also restricted the export of advanced US technology to Chinese firms.

Trump reentered office in 2025 promising far more comprehensive taxes on imports from China and other US trade partners. In early April, he put in place an across-the-board 10% tax on foreign imports, as well as higher tariffs on imports from most trading partners, before suspending much of that for 90 days. However, he made an exception to the pause: China. He doubled down on America’s largest Asian trading partner and soon increased the levy on Chinese imports to 145%. China responded by raising its new duties on shipments from the US to 125% from April 12, but said it wouldn’t match any further hikes announced by Washington because the Trump administration’s escalating numbers had “become a joke.”

The sky-high tariffs marked a dramatic step-up in trade tensions between the two countries. Then, on April 11, the Trump administration announced temporary tariff exemptions for smartphones, computers and other electronics like memory chips — most of which are made in China — giving global technology manufacturers including Apple a major reprieve. China’s government welcomed the exemptions and urged Trump to go further. Trump, however, has said those products will ultimately be subject to their own, different levy.

Trump’s stated goal is to end the US trade deficit and bring manufacturing back to US shores — a popular idea in America’s Rust Belt, whose communities were some of the most affected by the loss of jobs from the “China shock” and other rounds of offshoring by corporate America. The deficit with China is the largest of all the US trading partners, officially coming in at $295 billion in 2024, although in reality it is bigger due to imports under the de minimis loophole not being counted.

Trump has also complained that China didn’t abide by the terms of the trade deal signed in his first term, which was meant to redress the import-export imbalance, partly through a huge ramp-up in Chinese buying of American goods. While China did increase its purchases, they fell short of the targeted level and the trade gap was exacerbated by the pandemic-driven surge in US imports.

Beyond trade economics, the US and China are increasingly viewing one another as competitive threats and are trying to reduce their mutual reliance on goods seen as vital to national security. The US has limited or banned exports of many high-end semiconductors and the tools to make them, as it attempts to slow China’s technological and military advancement. Without these restrictions, the trade imbalance between the two countries would likely be smaller.

For its part, China has tightened export controls on a number of critical minerals and rare earths — crucial raw materials used in the likes of MRI machines and missiles — making them more difficult for US companies to access. China controls most of the production and processing of a whole host of these metals and minerals.

It’s unclear what exactly the tariff endgame could look like. While Trump has said that he wants a balanced relationship with China, others in his orbit want to go further and have called for a “strategic decoupling” — a tall order after decades of integration between the two economies. Prior to 2025, the average import taxes charged by each side on the other were less than 20%, even after the start of the trade war in Trump’s first term in office.

Trade accounted for around a third of China’s economic growth last year. While direct exports to the US only comprise about 15% of total shipments, that number rises once you include goods sent to Mexico, Vietnam and elsewhere that eventually end up in America.

In the face of triple-digit tariffs, China’s direct exports to the US could be eliminated almost entirely, according to Bloomberg Economics analysis, as American importers balk at the duties in excess of 100% that they have to pay. It will take time to find alternative sources for some goods where there’s near-total dependence on China, such as toasters, various chemicals and vitamins, and LED lamps.

There are signs that the tariffs are already having an effect on trade flows between the two countries. Chinese exports to the US were down 21% in April. The number of cargo ships that stopped at ports in China and were bound for the US plunged to around 48 in early May from a peak of 73 in mid-April, according to ship tracking compiled by Bloomberg.

Meanwhile, China’s retaliatory tariffs could sink shipments coming from the US, with imports down almost 14% in April. Chinese buyers will face higher prices for imports such as soybeans and liquefied petroleum gas, but the impact should be softened by China’s yearslong effort to diversify its trading partners and source fewer commodities from America, instead turning to Brazil, Russia and other friendlier nations.

The Chinese economy is in a weaker state than during the first trade war, grappling with persistent deflation, lackluster consumer demand and an extended property slump. Analysts at Goldman Sachs Group Inc. trimmed their forecast for the country’s economic growth to 4% this year, down from 4.5% previously and the 5% recorded in 2024. In April, China’s factory activity slipped into the worst contraction since December 2023.

To offset the hit, on May 7, central bank Governor Pan Gongsheng announced across-the-board rate cuts alongside other steps that could pump 2.1 trillion yuan ($291 billion) into the economy.

If the levies continue, both foreign and homegrown firms in China could shift production elsewhere, weighing on employment, cutting tax revenue and hurting gross domestic product. This threat to the manufacturing base could spur Chinese officials to expedite the pivot to a more consumer-focused economy, something economists have said is a more sustainable model and which the government has been talking about for years.

Chinese-owned exporters have a few options, but none of them are ideal. Firms can move more production to other countries in Asia that face lower US tariffs, including Vietnam and Thailand, as they did during Trump’s first trade war. However, China’s government is opposed to such an exodus and the risk Trump will reinstate the high “reciprocal” tariff rates allocated to those nations after his 90-day pause could dampen the appetite to make big investments. Chinese companies making solar panels in Southeast Asia were caught out last year when they were hit with American levies.

Another option for Chinese firms is to try to negotiate lower input prices with their suppliers to offset the impact of the tariffs for purchasers in the US. But that will likely worsen the factory gate deflation that’s become endemic in China and further push down corporate profits.

A third alternative is to keep the manufacturing engine running and shift exports from the US to other markets, and some companies are exploring opportunities in Southeast Asia and the Middle East. Such a move will likely spark pushback from nations already concerned about a flood of cheap Chinese goods undercutting their producers.

Tariffs will mean higher prices for US companies and consumers, potentially fewer options on store shelves and more expensive industrial goods and machines. The duties on Chinese goods alone are set to push up prices as companies will be forced to pass down at least some of the additional costs to preserve their margins.

Discount online marketplace Temu is passing on nearly all of Trump’s new import taxes to US customers on products directly shipped from China. At rival Shein, the average price for the top 100 products in the beauty and health category more than doubled in the last two weeks of April, while toys and games prices jumped by more than 60%.

Price hikes will increase inflationary pressures in the US. Unlike in 2018 and 2019, the new tariffs cover a much broader set of goods from China, including consumer items like smartphones, other electronics and clothing.

Certain US industries and workers will be hit hard by China’s retaliatory tariffs. The Trump administration is already considering plans to offer assistance to farmers amid worries that a trade war will have a disastrous effect on America’s agricultural producers. China was the largest US export market for soybeans and cotton.

In the last trade war, the US government offered $28 billion to farmers hurt by lost sales. Since then, China has diversified its suppliers of agricultural goods like soybeans, buying much more from Brazil instead. This could make it easier to pivot away from the US.

Source: Bloomberg Europe