London Midday: Stocks Pare Gains as Investors Assess US-EU Trade Deal

The striking of a better-than-feared trade deal with the U.S. last week has removed a significant economic uncertainty for Japan, further bolstering the improving fundamentals of the country, and helping lift equities to near-record highs.

Driving this was some relief among investors that while the agreed 15% tariffs on Japanese imports is higher than the 10% rate that was in force while the countries negotiated, it is lower than the 25% levy President Donald Trump had threatened. Importantly, Japan’s automotive sector, a pillar of the country’s economy and biggest contributor to its $63 billion trade surplus with the U.S., will incur the 15% rate and face no quotas on the volume of imports.The greater clarity that comes with the deal is welcome. However, in recent days, fresh political uncertainties have emerged in Japan following the July 20 elections, when the ruling coalition led by Prime Minister Ishiba lost control of the upper house of parliament.

This was the third major election defeat after losing a majority of seats in the October 2024 lower house election and most recently in the Tokyo prefectural (metropolitan assembly) vote, which have led to calls within Ishiba’s own party for him to resign. Ishiba has said he has no plans to step down. However, mounting speculation over the Prime Minister’s potential successor and the prospect of them forming a coalition with any one of the resurgent opposition parties, which have been calling for more fiscal stimulus and lower taxes, has led to a fresh spike in long-dated Japanese government bond yields.

As we highlighted in our analysis last month, Japan has led the march higher this year in long-dated government bond yields among advanced economies amid a renewed and sharper focus by investors on fiscal stability.

Seeing Through the Politics

In our view, such political machinations and volatility in the government bond market are to be closely watched, but they don’t alter our long-held constructive view on the country. We were overweight Japan equities before the U.S. trade deal was announced on July 22.

Indeed, we see the election results as unsurprising given a number of factors—including the current administration’s mishandling of inflation and political scandals—and view any change in leadership as immaterial to Japan’s sustainable economic growth and development over the medium term. Seen another way, we believe any potential change in leadership (Ishiba was still in power at the time of writing although the situation is fluid) could even help to bring in new views and ideas on sustaining the country’s growth trajectory.There are fundamental reasons why we remain constructive on the country, as we outlined earlier this year in our white paper on Japanese equities and more recently in our Q3 Equity Market Outlook.

First, Japan’s economy continues to gain momentum. Inflation is modestly stabilizing above the Bank of Japan’s targeted 2% and is high enough in our view to invigorate revenue and profit growth, while low unemployment and recent wage increases due to structural labor shortages have helped to boost spending among Gen-Z and Millennials. Meanwhile the stronger Japanese currency versus year-ago levels has helped to curb imported cost inflation.

Second, thanks to the corporate governance and capital management reforms of the past several years, Japanese companies are becoming increasingly conscious of corporate value from a shareholder’s perspective. This has resulted in companies reducing their cash hoard and streamlining their cross-shareholdings, as well as making better use of their capital through growth investments, which we view as accretive for EPS growth over the medium to long term.

Third, despite potentially stronger growth, record corporate buybacks and ongoing shareholder-friendly corporate reforms, Japanese equities remain under-owned and relatively attractive compared to global peers. For instance, the aggregate forward price-to-earnings ratio represented by the MSCI Japan Index currently stands at 15.2 times compared to 19.0 times and 22.4 times for the MSCI ACWI and S&P 500 indexes, respectively. *

Long-Term Growth Opportunity

As we continue to closely watch the political situation and any fresh developments in the government bond market, we maintain our constructive outlook on Japan, choosing to look through these short-term moments of flux in a country that is in a new period of economic transition.Clearly near-term risks remain, including volatile currency swings from monetary policy adjustments, which disrupted equity markets last August, but we believe high-quality Japanese companies may be an attractive long-term investment opportunity.

Source: Neuberger Berman

The United States and the European Union agreed on aframework trade deal, ending months of uncertainty for industries and consumers on both sides of the Atlantic.

Here are the main elements of the deal:

* Almost all EU goods entering the U.S. will be subject to a 15% baseline tariff, including cars, which currently face 27.5%, as well as semiconductors and pharmaceuticals. The 15% tariff is the maximum tariff and is not added to any existing rates.

* The U.S. is to announce the result of its 232 trade investigations in a few weeks and decide on tariff rates for the sectors under investigation. But the EU-U.S. deal already secures a 15% tariff for European chips and pharmaceuticals, so the results of the investigations will not change that, U.S. officials said. It is not yet clear, however, if the same 15% rate has been set for timber and copper, which are also under U.S. 232 investigation.

* The U.S. and EU will have zero-for-zero tariffs on all aircraft and their components, certain chemicals, certain generic drugs, semiconductor equipment, some agricultural products, natural resources and critical raw materials. More products would be added.

* The situation for wine and spirits - a point of friction on both sides of the Atlantic - is still to be established.

* Tariffs on European steel and aluminium will stay at 50%, but European Commission President Ursula von der Leyen said these would later be cut and replaced by a quota system.

* The EU pledged to make $750 billion in strategic purchases, covering oil, gas, nuclear, fuel and chips during U.S. President Donald Trump's term in office.

* The EU pledged to buy U.S. military equipment.

* European companies are to invest $600 billion in the U.S. over the course of Trump's second term. Unlike Japan’s package - which Tokyo says will consist of equity, loans and guarantees from state-run agencies of up to $550 billion to be invested at Trump's discretion - EU officials said the Europe's $600 billion investment pledge is based on private sector projects already in the pipeline.

Source: Reuters

The euro is busy on Monday morning. EUR/USD started the week in positive territory and rose as much as 0.30%, but has reversed directions in the European session and is trading at 1.1677, down 0.54% on the day.

EU and the US reach a trade deal

US President Trump can add another feather to his MAGA cap, with news that the European Union and the United States reached a trade agreement over the weekend. President Trump had threatened to hit the EU with 30% tariffs if a deal wasn’t reached by Aug. 1 and the specter of a nasty trade war between the largest two economies in the world has been averted.

A deal is of course good news but it’s important to keep in mind that the sides have agreed to a framework agreement, which is thin on details. Some contentious issues remain, such as the US tariff of 50% on steel and aluminum.

The deal mirrors the US-Japan agreement which was announced last week. The US will eliminate some tariffs, such as on aircraft parts and generic drugs, but most European products will face a tariff of 15%, which will make European imports more expensive for US consumers. The EU has also agreed to increase investment in the US by $600 billion and purchase $750 billion in US energy products.

The German auto industry is one of the deal’s big winners, as the 15% tariff will be easier to swallow than the current rate of 27.5%. The US-Japan deal puts a 15% tariff on Japanese motor vehicles, which would have put European automakers at a major disadvantage without a EU-US deal.

Trump is moving ahead and reaching deals with major trade partners, which is removing uncertainty and raising risk appetite. Investors are hoping that other key nations, such as Canada and South Korea, will follow soon with trade agreements with the US.

EUR/USD Technical

• EUR/USD has pushed below support at 1.1735 and 1.1710 and is testing 1.1677. Below, there is support at 1.1652
• There is resistance at 1.1768 and 1.1793

EURUSD 1-Day Chart, July 28, 2025

Source: ACTIONFOREX

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Source: CryptoSlate

In the end, Europe found it lacked the leverage to pull Donald Trump's America into a trade pact on its terms and so has signed up to a deal it can just about stomach - albeit one that is clearly skewed in the U.S.'s favour.

As such, Sunday's agreement on a blanket 15% tariff after a months-long stand-off is a reality check on the aspirations of the 27-country European Union to become an economic power able to stand up to the likes of the United States or China.

The cold shower is all the more bracing given that the EU has long portrayed itself as an export superpower and champion of rules-based commerce for the benefit both of its own soft power and the global economy as a whole.

For sure, the new tariff that will now be applied is a lot more digestible than the 30% "reciprocal" tariff which Trump threatened to invoke in a few days.

While it should ensure Europe avoids recession, it will likely keep its economy in the doldrums: it sits somewhere between two tariff scenarios the European Central Bank last month forecast would mean 0.5-0.9% economic growth this year compared to just over 1% in a trade tension-free environment.

But this is nonetheless a landing point that would have been scarcely imaginable only months ago in the pre-Trump 2.0 era, when the EU along with much of the world could count on U.S. tariffs averaging out at around 1.5%.

Even when Britain agreed a baseline tariff of 10% with the United States back in May, EU officials were adamant they could do better and - convinced the bloc had the economic heft to square up to Trump - pushed for a "zero-for-zero" tariff pact.

It took a few weeks of fruitless talks with their U.S. counterparts for the Europeans to accept that 10% was the best they could get and a few weeks more to take the same 15% baseline which the United States agreed with Japan last week.

"The EU does not have more leverage than the U.S., and the Trump administration is not rushing things," said one senior official in a European capital who was being briefed on last week's negotiations as they closed in around the 15% level.

That official and others pointed to the pressure from Europe's export-oriented businesses to clinch a deal and so ease the levels of uncertainty starting to hit businesses from Finland's Nokiato Swedish steelmaker SSAB.

"We were dealt a bad hand. This deal is the best possible play under the circumstances," said one EU diplomat. "Recent months have clearly shown how damaging uncertainty in global trade is for European businesses."

NOW WHAT?

That imbalance - or what the trade negotiators have been calling "asymmetry" - is manifest in the final deal.

Not only is it expected the EU will call off retaliation and remain broadly open to U.S. goods on more favourable terms, but it has also pledged $600 billion of investment in the United States over the course of Trump's term in office.

As talks unfolded, it became clear that the EU came to the conclusion it had more to lose from all-out confrontation.

The retaliatory measures it threatened totalled some 93 billion euros - less than half its U.S. goods trade surplus of nearly 200 billion euros.

True, a growing number of EU capitals were also ready to envisage wide-ranging anti-coercion measures that would have allowed the bloc to target the services trade in which the United States had a surplus of some $75 billion last year.

But even then, there was no clear majority for targeting the U.S. digital services which European citizens enjoy and for which there are scant homegrown alternatives - from Netflixto Uberto Microsoftcloud services.

For now, the deal does not shift the dial significantly on the already modest near-term expectations for the European economy, which at least is seen buoyed by increased German spending on defence and infrastructure in the coming years.

"We therefore still expect a modest slowing in (euro area) growth in 2H25," said Greg Fuzesi, euro area economist at JP Morgan, who also expected the ECB to make one further rate cut on top of 200 basis points of easing over the past year.

It remains to be seen whether the lop-sided deal will prompt European leaders to push ahead with the economic reforms and diversification of trading allies to which they have long paid lip service but which have been held back by national divisions.

Describing the deal as a painful compromise that was an "existential threat" for many of its members, Germany's BGA wholesale and export association said it was time for Europe to reduce its reliance on its biggest trading partner.

"Let's look on the past months as a wake-up call," said BGA President Dirk Jandura. "Europe must now prepare itself strategically for the future - we need new trade deals with the biggest industrial powers of the world."

Source: Reuters

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Source: Reuters