Trade Deal or No Deal?

President Donald Trump has triumphed with new trade deals this week, ahead of his August 1st deadline. A Japan trade deal has been secured and there have been headlines around a rumoured EU/US trade deal which has improved market sentiment. The developments have helped ease concerns over escalating trade tensions and brought a degree of stability back to global markets.

Japan Trade Deal

On Wednesday, the US and Japan announced a trade deal that implements a 15% flat levy, as opposed to the 25% Trump previously threatened. The agreement also includes a $550 billion Japanese investment package focused on U.S. infrastructure, clean energy, and semiconductors.

A key concern for the outlook for Japan had been the threat of looming tariffs and a bad trade deal from Trump, which risked undermining Japan’s export-driven economy. With major industries like electronics, machinery, and automobiles at stake - think household names like Toyota, Sony, or Panasonic – the potential disruption was significant. So, when the threat was lifted, markets breathed a sigh of relief: Japanese equities staged a relief rally, climbing 3.5% on the news.

Potential EU Trade Deal

Momentum is also building around a potential US–EU trade deal. Although no formal agreement has been signed yet, markets have reacted positively to reports that both sides are finalising terms for a new framework. The deal is expected to mirror aspects of the US–Japan agreement, with tariffs capped at 15%.

Industries likely to benefit include aerospace, luxury goods, and pharmaceuticals which are key sectors for the European export economy. Yet, it had been noted that Brussels still has countermeasures that can be activated quickly if Donald Trump fails to stick to agreed terms.

So, deal or no deal?

For Japan, it’s a deal. The agreement delivers immediate tariff relief, secures massive investment pledges, and removes a major threat to its export-driven economy. While not without compromise, it offers short-term certainty and a clear market boost.

For the EU, it’s not quite a deal yet. While markets remain hopeful and talks appear to be nearing completion, a formal agreement has yet to be signed.

Overall, the market impact was positive: Global stocks climbed this week, boosted by fresh trade deal optimism. This upbeat mood helped US equities hit new highs and lifted markets worldwide as investors gained confidence in smoother global trade flows.

The Noise

• UK government borrowing rose to £20.7bn in June, which came in £6.6bn more than last June and £3.6bn higher than forecasted. It marks the second-highest net public borrowing for June since records began in 1993 and comes in second to the June of Covid-19 in 2020. In terms of what this data means, it has increased expectations of tax rises in the Autumn Budget.

• Bond markets showed mixed reactions this week amid shifting economic data and investor sentiment. UK government debt saw 10-year borrowing costs briefly fall by 0.05% following the release of higher-than-expected borrowing figures, though recovered by Tuesday’s close. This volatility reflects market uncertainty around fiscal policy and the potential impact on future borrowing costs.

• Currency markets continued their recent trends this week, driven by trade developments and shifting investor sentiment. The Dollar continued to depreciate relative to a basket of developed market currencies this week, down 0.8%. The Euro steadied on hopes for an EU-US trade pact, while emerging market currencies generally benefited from easing global trade tensions.