There is a mild risk off tone to markets on Tuesday as the focus swings back to trade deals as we get close to the July 9th deadline to forge trade agreements with the US. Fears are mounting that the UK and China are the only countries with agreements in place.
The rally in US, Asian and some European indices in the past 3 months has been driven by hopes that Trump would perform his usual ‘TACO’ and cave in at the last minute. If he doesn’t do this or if he doesn’t kick the can down the road, then the stock market rally could come to an abrupt halt.
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Japan’s Nikkei tumbled more than 1% on Tuesday, after Donald Trump threatened to increase tariffs saying that Japan remained unwilling to accept US rice exports. This is a sign that the US President is willing to play hardball with trading partners, even though we are days away from the 9th July deadline to reach agreements. So far, there are no signs that Japan will cave in to the US demands.
EU keen to get tariff deal before deadline
The White House has said that it will ‘set the rate’ for countries that do not come to the negotiating table in good faith. However, there are reasons for optimism. On Tuesday, the EU said that it would accept a 10% universal tariff on most of its exports, although it was looking for exemptions on autos, steel and aluminum. Reports suggest that an interim agreement between the currency bloc and the US will be completed in time before the deadline, which would allow discussions to continue.
European stocks are lower on Tuesday, as the risk rally takes a breather. We expect risk sentiment to remain shaky until a deal is agreed, if a deal is not agreed then exports to the US from the EU will be subject to a 50% tariff rate from next Wednesday, which is why investors are on pause for now and are waiting for concrete news before making their next move. Also, an interim agreement that does not include tariffs on key sectors of the EU economy, like pharma, could lead to more market anxiety as it drags the process out further.
European shares weighed down by underperforming defense stocks
It is no wonder that markets are taking a break on Tuesday. European stocks are lower, and futures are pointing to a lower open in the US later today. Over the last month, the defense stocks that have led European markets higher for most of 2025 have lost momentum. Germany’s Rheinmetall is down more than 5% in the past month, car companies have lagged, with Mercedez Benz and Volkswagen both down more than 7% in the last four weeks. This suggests that tariff risks are starting to weigh on European stocks, and it could be a tough start to July.
The best performers in Europe in the past month have been linked to the tech sector: tech stocks and electricity firms have led the Eurostoxx 50 index. This follows the US, where a mixture of crypto-linked stocks and semiconductor companies have led the US index in recent weeks.
Euro takes a breather as ECB gives warning on strength
Fears about tariffs are also showing up in the FX market, the euro is one of the weakest currencies in the G10 so far on Tuesday, as the single currency takes a breather. The euro may struggle to make gains above $1.20 vs. the USD, after ECB member Luis De Guindos said that a move above this level would be problematic for the currency bloc, especially in the era of US trade tariffs. The ECB had assumed EUR/USD to average $1.11 for this year, which has been a large under estimation of euro strength. Thus, we could see the ECB act as a barrier to further euro strength in the coming weeks, and EUR/USD could be reaching a high.
Trump tanks Tesla
Donald Trump’s footprint is also notable in US stocks in the pre-market on Tuesday. Tesla shares have slumped nearly 4.5% on Tuesday morning, after the President said that Tesla benefitted excessively from government subsidies on EVs. Trump took aim at the government subsidies propping up Musk’s businesses and also posted on Truth Social that he would ask DOGE to see where savings could be made. The fallout between Musk and Trump has dramatically raised the headline risk for Tesla’s share price.
Apple admits AI limitations
Elsewhere, the focus will be on Apple later today. The company has said that it will look for an outside AI provider to power Siri. This is a major reversal but could be one way to boost AI capability in Apple products. Investors are not impressed so far, and Apple’s share price is lower in the pre-market. This news highlights Apple’s limited AI capabilities, which is hindering its share price since AI is becoming a key theme for stocks once again. It is also a sign of the risk off tone that has gripped markets as we move into July.
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