Trade Deals and Rate Reveals

This week in Summary

After a tumultuous month in April, short-term tariff induced volatility across global markets seems to have calmed down (for now), as the market awaits further news on trade agreements, and the Trump administration has softened its tone somewhat with respect to global negotiations. The big news this week was that the US and UK delivered a trade deal, buoying wider global equity markets. Outside of trade agreement news, global markets oscillated as investors digested news on interest rates from the US Federal Reserve and the Bank of England, as well as further news from corporates on quarterly results and future guidance.

The US/UK Trade Deal

In terms of the trade deal, Trump and Starmer announced on Thursday that the US will scale back some of the new tariffs on UK exports of autos (from 25% to 10% for the first 100,000 cars), steel and aluminium (from 25% to 0%), aerospace parts (10% to 0%), and potentially preferential treatment for UK pharmaceutical companies.

Yet, this new trade deal is too small to matter much, especially for the US. Rather, it matters in the sense that it is a signalling mechanism. When comprehensive trade deals normally take years, how did this one take weeks? There are several reasons:

US-UK trade talks have been on-and-off for years, so there was a foundation;
trade between the US and UK is relatively balanced;
the US-UK ‘special relationship’;
but most importantly it is a narrow and limited deal focusing on a small set of sector transactions.

This is in line with what many market participants were expecting post ‘Liberation Day’. Whilst it was largely expected, it sets the framework for what is likely to come next – more of the same quick, sector-focused, transactional deal-types. For which countries? Of the major ones, South Korea, Japan, and India are most likely next.

Despite the relatively limited size and impact, wider global equity markets were lifted by the news of the UK/US agreement. This was not down to the trade deal specifics but rather by both the speed of the agreement, which signals that other country deals may also be rapid, and also it demonstrated optimism from President Trump on talks with China and the likelihood that US tariffs could be reduced from 145% to 50-60% in weeks.

The Nuance

Two of the largest central banks had their monetary policy meetings on Wednesday, where they decided on the interest rates for their respective regions. The Bank of England (BoE), cut interest rates for the United Kingdom by 0.25% to 4.25%. In contrast, the Federal Reserve held their interest rate steady at 4.50% for the United States for a third consecutive meeting. Both of these decisions were within market expectations and in line with consensus.

These interest rate decisions are complex and influenced by a web of economic indicators such as inflation trends, job market data, and growth forecasts. One of the key goals of a central bank is to try and set interest rates to balance inflation without stifling economic growth.

How do interest rates affect investors on a day-to-day basis? An interest rate is the cost a debtor incurs when borrowing capital, or the payment a lender receives when they loan money to a debtor (someone who borrows money). i.e. the money you make off lending or the cost you pay for borrowing. It is a percentage proportional to the amount of money lent/borrowed.

Bank of England interest rates serve as a benchmark for how banks set interest rates on loans, credit, and deposits. The chart below illustrates this correlation.

What a central bank interest rate cut means for investors:

Lower borrowing costs:
Reduced rates on credit-based financial products (e.g. mortgages, credit cards).
Lower savings returns:
Decreased interest rates on fixed savings products (e.g. ISAs, savings accounts).

What a central bank interest rate hike means for investors:

Higher borrowing costs:
Increased rates on credit-based financial products (e.g. mortgages, credit cards).
Higher savings returns:
Increased interest rates on fixed savings products (e.g. ISAs, savings accounts).

In summary, central bank interest rate decisions are crucial for shaping economic conditions and have direct implications for investors. These decisions are key as they affect both lending and saving opportunities, and ultimately, the overall investment environment.

The Noise

Equity markets have levelled out at pre-‘Liberation Day’ levels. At the beginning of the week, they were weighed down by renewed concerns over inflation and a shifting interest rate outlook. Yet by the end of the week, they ticked up, driven by positive signs that the US is flexible with their trade tariffs on the US/UK trade deal news. While macro uncertainty remains, this week showed markets’ ability to climb the wall of worry, at least for the time being.

The big moves in the currency market this week revolved around the Taiwanese Dollar. Taiwan’s currency jumped 13% in two days - its biggest rise in decades, strengthening its currency. Fuel was added to the fire when big Taiwanese insurers rushed to protect themselves from losses, buying up local currency and further riling up the rally. While officials denied any pressure from the US, markets weren’t convinced. These currency moves have demonstrated an unintended influence of tariff uncertainty. Currency swings like this don’t just affect foreign exchange rates when you go on holiday - a stronger currency could hurt Taiwan’s exports as goods and services become more expensive for foreign buyers.

Oil prices have sunk down 15.8% since the beginning of the year (Source: FactSet, Crude Oil Brent Global Spot ICE ($/bbl)) weighed down by fears of a global economic slowdown. Trade tariffs have been perceived as dampeners on global trade and, stifling cross-border commerce and by extension, oil demand. Oil markets are highly sensitive to changes in economic sentiment because crude demand is closely linked to manufacturing output, transport logistics, and consumer spending - all of which take a hit when trade weakens.

The Niche – A fun financial fact

A study in 2014 explored stock returns and the FIFA World Cup (“the World Cup”). It found that market performance can be influenced by the host nation of the global football tournament, as shown through post-event market reactions. They also saw association between winning the World Cup and the respective country’s subsequent stock market performance for a short period of time. A study by Goldman Sachs (2014) revealed that winning the World Cup does in fact affect the stock market and their findings concluded an outperformance of 3.5%, however it only lasted for about three months.

Disclaimer

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.