Illustration: Lazaro Gamio/Axios

As news about a possible truce between the U.S. and China in the trade war flowed last week the U.S. market was remarkably unshaken.

Why it matters: That's because investors aren't concerned about President Trump taking a hard line on a deal with China — one that would involve major reforms to their economy and the way the Asian nation does business.

  • Investors have determined that Trump is either a great deal maker or a studio gangster. His tough talk about major changes in the end become incremental tweaks.

The big picture: A deal in which 3 major trade issues — expanded market access, reduction of the trade deficit, reform of IP theft — are addressed with credible enforcement procedures in place is "the ideal situation," writes former macro hedge fund manager Tom Essaye in his Sevens Report market analysis, "and it's also the least likely (say 20%)."

Between the lines: Betting that Trump will not to follow-through on the extreme rhetoric of his campaign pledges has worked out well for fund managers over the past two years.

What they said: "Our view was that (Trump’s) economic threats were not credible," Federico Garcia Zamora, who manages the Dreyfus Emerging Markets Debt Local Currency Fund, told me in September 2017. Acting accordingly, he increased his holdings of peso-denominated Mexican bonds and his fund outperformed 90% of its peers.

  • "It was what he had to say to get elected, given his space and the people he was talking to. But it made no economic sense."

That didn't change much last year.

"Our basic view is that it's really just a lot of noise," Brendan Murphy, head of global and multi-sector fixed income for Standish Mellon, a BNY Mellon subsidiary, told me in April 2018.

But, but, but: Not every Trump-is-a-studio-gangster trade worked out well. Investors bought into emerging markets in late 2017 and early 2018 and lost big as both EM debt and equity were crushed.

  • However, most analysts believe that was due more to the Fed's rate hikes and expectations for global quantitative tightening to take effect in 2019 than the trade war.
  • And that trade is quickly reversing.

What's really happening: The U.S. market has been driven by Fed Chair Jerome Powell. Stocks swooned to near a bear market after Powell said the U.S. central bank was poised to keep hiking rates and draining liquidity by paring its $4 trillion balance sheet. It has marched higher since his U-turn in late December and January.

U.S. Treasury yields initially spiked after Trump's election but have come back to earth as inflation expectations were "pretty much diminished because we didn't get a much stronger economy," Joseph Trevisani, senior analyst at FXStreet, said in April.

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