Markets

And it’s a deal. The US and European Union struck a trade agreement yesterday, concluding months of back and forth negotiations. Both parties agreed an across-the-board 15% US import levy, covering all goods. That includes cars (which are currently struck by a 27.5% tariff) and according to EC president von der Leyen and senior US officials also semiconductors and pharmaceuticals. US president Trump recently said global tariffs on the latter could be as high as 200% over time after a so-called Section 232 probe comes due over the next three weeks. The 15% does not cover EU’s steel and aluminum, which remain subject to a 50% duty. Securing the 15% instead of the 30% that was set to kick in if no deal was found by August 1 required a buy-in though. The EU agreed to buy $750bn in American energy products over the next three years, to invest $600bn in the US and purchase “a vast amount” of US military equipment. Buying off a lower tariff is also what Japan did with a $550bn investment fund. For now, though, it appears that stocks are the only category actually enjoying the good news. European futures point to a higher open of around 1%+. Bund futures trade weaker (ie. yields to open higher) but are off the intraday lows. We nevertheless believe the weekend breakthrough further strengthened the bottom below European yields, but at the front and the long end of the curve. The euro gapped higher at the Asian open this morning to EUR/USD 1.178 but immediately fell prey to some modest profit-taking. The currency pair is currently back at Friday’s (which, by the way, was an uneventful session) closing level of 1.174. These market moves have an aura of buy the rumour, sell the fact. Speculation was already lingering by end last week of the US and EU nearing an agreement in which the latter was willing to accept a 15% rate. But that doesn’t make it less disappointing that EUR/USD not even came close to the July high of 1.1829. We’ll need confirmation in European and US dealings but it suggests the euro is taking a short-term breather. That also means any potential next upleg in EUR/USD would have to come from dollar weakness. A heavy eco calendar this week at least provides plenty of opportunities. The US update includes JOLTS job openings and consumer confidence tomorrow, Q2 GDP figures and the FOMC decision on Wednesday and the payrolls report on Friday. Several EA member states print growth and inflation numbers over the next days. Trade will remain a critical topic this week, even as the US having secured deals with major trading partners Japan and EU ahead of August 1. Talks with China continue today with a.o. the aim of extending the trade truce beyond the August 12 deadline. Meanwhile, the earnings season rolls into its busiest week (Microsoft, Apple, Amazon and Meta Platforms …).

News & Views

Rating agency Moody’s upgraded Turkey’s credit rating to Ba3 from B1 with a stable outlook. Turkey’s rating is now three notches below investment grade and on par with the ones assigned by Fitch and S&P (both BB-). The upgrade reflects strengthening track record of effective policy making, more specifically in the central bank’s adherence to monetary policy, Moody’s said. That should durably ease inflationary pressures, reduces economic imbalances, and gradually restores local depositor and foreign investor confidence in the Turkish lira. The agency noted a reduced yet still-present risk of policy reversal in the coming years. On a macro level, Moody’s foresees annual inflation to drop to 30% by year’s end and to around 20% by end 2026. GDP growth is expected at 2.2% for this year, below potential growth estimates ranging between 3.5% and 4.5%.

Japan’s top chief negotiator Akazawa said he expects only 1-2% of the recently agreed upon $550bn US fund to be in the form of actual investment, Bloomberg reported. It is on this percentage that investment profits would be split at a 90-10 ratio with the US collecting the larger part. This investment fund was a key pillar in the US-Japanese trade deal concluded last week with which Japan bought off a lower import tariff of 15% (instead of 25%). But being conceptually new, its details remain vague. Akazawa said the bulk of the funds would be dispersed via loans, on which Japan will be earning interest payments, and through loan guarantees, on which – if nothing happens – it will be collecting fees.