Risk is back on, as the US and China ink trade agreement

It’s been a fantastic week for US stocks, the Nasdaq made a record high earlier this week, Nvidia is higher by nearly 7% and has retaken the top spot as the world’s most valuable company, and there is a chance that the S&P 500 will follow suit, and will also make a fresh record by the end of this week.

There are three main drivers for US stocks this week:

1, reduced geopolitical tensions: no one would have thought a week ago, that a US strike on Iran would be compatible with US stocks reaching record highs, but this is the world that we live in. The US strike on Iran led to a ceasefire between Iran and Israel, the Strait of Hormuz has stayed open, and the global oil supply was unaffected, which is why the market rapidly priced out a war premium from global assets. This is why the S&P 500 is only a few points away from February’s high, and why the brent crude oil price is lower by 11% this week.

2, Rate cut bets: news that Donald Trump may announce his pick to the be the new Fed chair with months to go has led the interest rate futures market to ramp up bets that interest rates in the US will be cut sharply over the coming months and years. There are nearly 5.5 rate cuts priced in by the Fed Fund Futures market by the end of 2026. This sharp decline in the expected price of money is doing a lot of heavy lifting for stocks. US Treasuries have outperformed global bonds this week, and yields have dropped sharply across the curve. Stocks and bonds rally together when rate cuts are on the table.

3, Tariffs pressures ease: The key theme for markets in the next week and a half will be US trade agreements, as July 9^th  is the deadline for the reciprocal tariff reprieve. There has been some good news on this front. Both China and the US have confirmed that they have agreed a trade framework going forward, and the US Commerce Secretary has said that the US has reached an agreement with its G7 allies that will exclude US companies from certain taxes imposed by its peers, in return for President Trump excluding the revenge tax element from his ‘big, beautiful’ tax bill. There were fears that the revenge tax would make it much harder for companies and individuals to invest in the US, since it would increase their tax rates in revenge for taxes in their home country. There are still more trade agreements to be done, for example, with the EU, but things are moving in the right direction.

Will the bond market stop the pound’s strong run?

Positive headlines are enough to boost risk sentiment on Friday, and European stocks are higher as we end the week. The dollar is also weaker, with gains for the euro and the pound. $1.40 looks inevitable for GBP/USD as sentiment continues to drain from the dollar, and as momentum is on the upside. The market seems to be ignoring the UK’s economic woes, although are they really worse than anywhere else? All eyes will be on the UK’s bond market after the PM scaled back benefit cuts to avoid upsetting his MPs, although benefit reform and cuts are popular with the electorate. This is the second U-turn from the government that will have a big budgetary impact after the winter fuel allowance. The risk is that this government mess will lead to a summer of low confidence for consumers and businesses as they fret over the prospect of more tax rises. If bond yields rise on the back of another U-turn, we could see sentiment drain from the pound.

US stocks outperform European stocks, as tech takes over

US stocks have outperformed European stocks so far this week, as the semiconductor and communications sectors have boosted US stock markets. As the tech theme comes back to drive US markets higher, the UK’s FTSE 100 has been a laggard, dragged down by oil companies and stocks with a defensive flavour like consumer staples stocks Reckitt Benckiser and Unilver.

Ahead today, PCE data for the US will be in focus. Unless we get a large upside surprise, then momentum could carry the S&P 500 to a fresh record.