The Final Countdown
We are moving closer towards the 1st of August deadline for tariff negotiations. The US administration has announced a few trade deals with Indonesia, Vietnam and Japan and they have also pointed out that there a few more in the pipeline.
The market seems to be discounting very little negative tail risk as of now, given the tariff negotiation talks. One thing is for sure, that once this is over there will be cheers and high fives across market participants, again assuming everything will end up in a market-friendly way! So far President Trump and his administration, is managing to re arrange the balance of trade across different countries facing the US market. It is obvious to us that tariffs are also a revenue generator to cover some ground towards the US budget deficit. This week President Trump announced that there is a deal signed with Japan with a 15% tariff regime and a $550bn investment commitment from Japan towards projects that the US administration will choose. The market applauded the trade deal, moving towards the recent new highs. US equities are trading 1-1.5% higher on the week outperforming its peers. Heaven assets are trading with a weaker tone, with gold unchanged on the week, at $3345 per ounce. EURUSD is fluctuating in a tied range from 1.17-1.18 with more balanced flows.
On the rates side, we had another move higher this week across both sides of the pond. The ECB meeting provided a more hawkish tone pushing European government bonds through the recent highs, with the 10yr German government bonds trading at 2.75%. Let me remind you that a week ago we were trading in the 2.58% range, and the year wide was around 2.9%. Treasuries followed through with the 10yr bond trading in the 4.42%. As it stands after the ECB meeting, the market is expecting a 30% probability of another rate cut by year end with a few main street banks calling for no more rate cuts by ECB this year. (see below graph)
In terms of earning announcements, we keep seeing better than expected results coming through. The market expectation re-earning’s growth for S&P companies sits at 5.8%, a number which can be easily beaten especially if the MAG 7 drive better than expected returns. In terms of data, we are seeing a mixed picture in Europe with regards to PMI but all in all no sign of an imminent recession. That also applies to US data, with a firm labor market and no sign of inflation moving higher, at least for now.
Looking ahead…
There has been strong momentum with regards to a EU-US trade deal with reports being issued at a 15% tariff rate. Nothing has been concluded as the market waits for a deal to be announced. Moreover, we are in the peak summer period with less issuance coming through and a few market participants taking time off. On the back of that and as usual, there is a liquidity premium attached to recent market moves which will be visible for the next 2-3 weeks. The market remains optimistic as of the trajectory of risk assets into the second half of the year, especially if the data announcements show no economic backdrop. We currently sit in the more optimistic camp of the market as for us, this is the “final countdown” before a new economic cycle starts both in Europe and the US. Have a great weekend!
Written by: Michael Konstantinou, Senior Portfolio Manager
Source: Bloomberg
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