Stock markets experienced a downturn on Friday as President Donald Trump declared that China had “totally violated” its trade agreement with the United States. This announcement triggered a negative reaction in the markets, with the Dow Jones Industrial Average ticking lower. The broader S&P 500 index fell by 0.2%, and the technology-focused Nasdaq Composite slid by 0.4%, reflecting investor concerns over the renewed trade tensions.

President Trump elaborated on his stance via social media, stating, “The bad news is that China, perhaps not surprisingly to some, HAS TOTALLY VIOLATED ITS AGREEMENT WITH US. So much for being Mr. NICE GUY!” Despite the strong rhetoric, the market's overall reaction was relatively subdued. Some Wall Street analysts attribute this to a prevailing sentiment dubbed the ‘TACO’ trade, which suggests that investors anticipate President Trump will eventually retreat from his trade war threats.

The President's comments on Friday brought the trade war back to the forefront of market concerns, capping a week marked by significant tariff-related developments. Earlier in the week, stocks had rallied after the Court of International Trade (CIT) blocked most of Trump’s tariffs on legal grounds. However, this optimism was short-lived as traders speculated that the White House would aggressively appeal the decision. Subsequently, a federal appeals court paused the CIT's ruling on Thursday, leaving the administration's extensive tariff agenda in a state of legal uncertainty as judicial deliberations continue.

The complexity and volatility of the trade situation are expected to persist. Greg Valiere, chief US policy strategist at AGF Investments, commented on the matter, noting, “The stunning, head-spinning, mind-boggling trade fiasco will not be resolved quickly. It probably will land in the Supreme Court — and even that may not settle the issue,” highlighting the potential for a prolonged period of trade-related instability.

Beyond trade news, investors also processed new economic data released on Friday. The Federal Reserve’s preferred inflation gauge indicated a slight cooling in April, more than economists had anticipated. However, the same data revealed a significant decline in consumer spending, adding another layer of economic consideration for the markets.

Despite the recent turbulence, the broader market, particularly the S&P 500, has shown resilience. The index has been steadily recovering from a slump experienced in early April, which was initially triggered by the President's fluctuating stance on “reciprocal” tariffs. Remarkably, the S&P 500 is up more than 6% for the current month and is on course for its best monthly performance since 2023, as well as its strongest May showing since 1990. This suggests that investors who divested at the beginning of May missed out on a historically strong market period.

Nevertheless, significant uncertainty regarding tariffs continues to loom over the market. Clark Bellin, president and chief investment officer at Bellwether Wealth, emphasized this point, stating, “Even though the stock market has staged a decisive rebound since the April lows, there is still plenty of uncertainty on tariffs, especially given the legal battle that is brewing over the ‘Liberation Day’ tariffs.” This underscores the ongoing risks associated with the trade disputes.

In currency markets, the US dollar showed strength on Friday. The US dollar index, which tracks the dollar against a basket of six major foreign currencies, is poised to end the month with a slight gain. This would mark an end to the dollar's four-month losing streak. Looking ahead, market participants should brace for continued fluctuations. Ulrike Hoffmann-Burchardi, CIO of global equities at UBS Global Wealth Management, advised in a Thursday note, “We expect bouts of market volatility ahead as investors continue to navigate a range of market, economic and geopolitical risks.”

Overall, the benchmark S&P 500 index is up approximately 0.5% year-to-date. The situation remains dynamic, and this story is still developing and will be updated as new information becomes available.