Markets welcome eu-us trade deal

Our weekly market overview from Quilter Cheviot

By Richard Carter, Head of Fixed Interest Research

Market overview

The European Union has struck the biggest trade deal so far with the US, signalling more positive news on the international trade front. A baseline 15% tariff will be applied to European goods, with the EU agreeing to buy US$750bn of energy products and invest an additional US$600bn in the US. European stocks responded positively on Monday morning, rising 1% to hit a four-month high with US stock futures also up.

The EU is the largest regional trading partner with America, with over US$5bn worth of goods and services exchanged every day. Details are yet to be confirmed but it is believed that the US’s global steel and aluminium tariffs, currently 50%, will remain unchanged.

There has been swift progress on the US trade front in recent weeks as the 1 August deadline approaches, with a number of deals announced. The US and Japan reached an agreement for a so-called reciprocal 15% tariff that will see Japan invest US$550bn in the US. The US will receive 90% of profits from the investments. The treatment of Japanese cars was a key point of contention in negotiations and the tariffs on autos will be lowered to 15% from the current 25%. Separate agreements have also been made with Vietnam facing a baseline tariff level of 20% and the Philippines and Indonesia subject to a 19% rate.

Weekly economic announcements:  

Last week the MSCI All Country World Index rose 1.4% (13.2% YTD).

United States:

US stocks marginally outperformed last week, rising 1.5% (9.4% YTD). The gains meant a second week in a row of new all-time highs for the benchmark. Growth stocks underperformed value stocks and small caps lagged large caps. Tech-based indices gained, albeit at a slower pace (1.0%, 9.7% YTD) to also hit new record highs. A positive news flow with regards to trade deals lifted markets.

United Kingdom:

UK equities closely tracked global peers last week, rising 1.4% (14.0% YTD). Mid-cap indices added 1.1% (9.5% YTD). The latest retail sales data disappointed despite the warm weather in June, showing a 0.9% monthly increase compared to consensus forecasts for 1.2%.

The pound closed the week near where it started it against the US dollar at US$1.34. The 10-year gilt yield declined 4 basis points (0.04%) to end a fairly subdued week at 4.63%.

Europe ex UK:

The MSCI Europe ex UK index edged up 0.5% last week (11.0% YTD). German stocks dipped 0.3% (+21.6% YTD) while French benchmarks gained 0.2% (9.3% YTD) and Italian bourses rose 1.4% (23.6% YTD). The single currency ended the week at US$1.17.

The European Central Bank kept its main policy rates unchanged following its latest meeting, with the deposit facility rate at 2%. Following eight cuts in just over a year the decision to pause was widely anticipated.

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