The Week Ahead

The Week Ahead: EU/ Trade deal done, as US rate decision awaits

The big news of the weekend is the EU/US trade deal. With any trade agreement brokered by Donald Trump there is usually only one winner and that’s the US. The EU’s exports to the US will now face a 15% levy, the EU has pledged to invest $600bn into the US and buy $250bn per year of US energy products for the next three years, as well as purchasing US military equipment. On the other side, it could have been worse for the EU, the tariff rate is half the 30% rate that President Trump threatened the EU with earlier this month.

Pharma ‘win’ for the EU

The market reaction is positive. European stocks are higher as a relief rally takes hold. Certainty about the future trading relationship with the US is having a big impact on financial markets. Luxury stocks including Hermes and LVMH, pharma stocks, energy firms and stocks linked to semiconductors are all rising at the start of this week. The big win was for pharma. Earlier on Sunday, it was not clear if pharma was included in this agreement, however, officials on the US and the EU side have said that pharma exports are also included within the 15% tariff rate.

The healthcare sector is the second-best performing sector on the Eurostoxx 50 index and is higher by 1.5% on Monday. In Germany, the  Dax is lagging the main European index and is higher by 0.4% on Monday. Share prices of car companies like Volkswagen and BMW are lower today, even though auto tariffs dropped from 25% to 15%, the question is 15% low enough?   Defense stocks are also struggling, after the EU pledged to buy US military equipment, and Rheinmetall is the weakest stock on the Dax this morning.

Deal not signed, sealed or delivered until all member states agree

The deal could come under some pressure; EU member states have to agree to the deal. So far, Italy’s PM has said that she needs to review the details, while France’s European Affairs minister said that the deal was unbalanced, which suggests that there will be some fiery debates within the currency bloc in the coming days. Also, President Trump seemed to hint that there will be no retaliatory tariffs on US exports to the EU, however, EU President Von der Lyon, dismissed this, and said that some retaliatory tariffs will be applied to some US exports to the EU. Thus, the relief rally could be tempered as the details of the agreement are digested at the start of this week.

Trade agreements have only one winner

The FTSE 100 is a laggard so far, as European stocks steal the limelight. US stock market futures also point to a stronger open later today. The EU and Japanese trade agreements, and the pledges for both to invest heavily in the US, could boost the US coffers and the US economy in the coming years. These deals could set the stage for US stock market outperformance for the rest of the year. The S&P 500 reached a record high at the end of last week, and it could extend gains into record territory later Monday. For now, good earnings, strong volume, and positive economic signals are key drivers for US stocks, and we may continue to see US stocks outperform European indices in the coming weeks. In the past month, The S&P 500 has risen by 3.5%, compared to a 1.4% rise for the Eurostoxx 50 index.

Euro weakness highlights concern at trade agreement

Interestingly, the euro is weakening today and is not benefitting from the trading euphoria. The euro is one of the weakest currencies in the G10 FX space on Monday, as the dollar is stronger across the board at the start of the week. A faltering euro could be a sign that FX traders are less enthusiastic about the trade agreement compared to stock traders. It is also a symbol of the shifting trade relationship between the US and Europe, with the rebalancing potentially hurting the EU more than the US, as it attracts tariff levies and investment flows from the currency bloc.

Bearish institutional names need to catch up with retail trader sentiment

In other trade news, the US and China are re-starting their trade talks today. However, trade is not the only factor that will drive markets. There is a Fed meeting, it is the biggest week for Q2 earnings on both sides of the Atlantic, and there is a data deluge including the NFP report on Friday. The better tone to economic, corporate and trade news is spurring a stock market rally that is gathering pace as we move through the summer months, and US stocks’ YTD performance is catching up with European markets. Some have argued that stocks are in a bubble due to the presence of retail investors being big buyers of tech stocks, and some meme names. However, we argue that institutional investors, who had bearish calls on risk sentiment earlier this year, are going to have to play catch up with the retail investor.

Why the positive tone for markets could continue

As most major economies have now secured a trade agreement with the US, this key risk for equities has now been removed. Thus, tariff concerns are no longer a barrier to stock market performance and momentum. There is likely to be no policy change from the FOMC meeting this week, big tech earnings are expected to remain buoyant, and the NFP report is not expected to show labour market weakness due to the impact of tariffs, at least not at this stage.

This is a big week for financial markets, below, we look at the three most important events:

1, FOMC meeting: political posturing to take centre stage

No change in interest rates is expected on Wednesday, although there could be a contentious debate at the Fed as FOMC members argue about where rates should go in the future. President Trump is putting Fed chair Jerome Powell under intense pressure to cut rates; however, this has been resisted as the Fed waits to see the impact of tariffs on prices. There is virtually no chance of a rate cut at this week’s meeting, however, there is a 62% chance of a cut in September, and the market will be parsing the Fed statement and Chairman Powell’s press conference to ratify this view.

Some Fed members may vote for a rate cut, including Christopher Waller, who is in the running to replace Powell as chair next year. He has argued for a rate cut due to potential weakness in the labour market. However, any dissents in favour of a rate cut could be seen as political posturing, with some members doing this to persuade President Trump that they should be the next chair.

Better than expected economic data, and trade agreements with reduced tariff levies could ease some fears about the inflationary impact from US trade policy, which could leave the door open to a rate cut in September. We also expect the focus of Powell’s press conference to be on his relationship with Donald Trump rather than the future direction of monetary policy. Thus, there may not be too much ‘news’ from this week’s meeting. However, a softer tone on the inflation outlook could boost expectations of a September rate cut, and weigh on the dollar, which has been the best performing currency in the G10 FX space so far this month.

2, Earnings: tech in focus

We are one third of the way through the Q2 earnings season, and so far, the news is good. The number of companies that have reported positive earnings surprises on the S&P 500 is above average levels, according to FactSet, even if the magnitude of positive surprises is lower than average.

If these posituve surprises continue in the coming weeks, then the S&P 500 could boost its earnings growth rate, since the YoY growth rate in earnings is at its lowest level since Q1 2024. The financial and communication sectors are the largest contributors to the overall earnings growth rate for the S&P 500 so far in Q2. The health care sector has been a laggard, along with energy. Revenue growth across sectors has been positive so far, which has defied fears about a slowing US and global economy. It also suggests that private companies have been resilient to tariff threats. Now that they have receded, revenue growth could strengthen into year end.

This week, Apple, Amazon, Microsoft and Meta earnings are the highlight. AI spending plans are the key focus for investors from these earnings. Meta continues to spend huge amounts on AI, while Alphabet last week announced a large increase in capex spending on its data centres and AI capability. So far, tech stocks have been rewarded for posting better than expected results, and Google’s stock price jumped by 4% last week, and is higher by 15% in the past month, as tech stocks lead the US market higher, the tech sector in the S&P 500 also reached a record high last week.

3, Payrolls: monthly test for US labour market in focus

The latest US labour market data will round off the week. The market is expecting a reading of 109k for payrolls for July according to Bloomberg’s economist estimates, down from 147k in June. The unemployment rate is expected to tick higher to 4.2% from 4.1% last month. Annual wage growth is also expected to tick up a notch to 3.8%. Some are looking for a much larger increase in payrolls for July, and for this week’s report to show another solid month of jobs growth. Numerous factors that are underpinning the US labour market right now, including a smaller drop in government payrolls due to the end of Doge efficiencies in government departments, a pickup in construction hiring, and a boost to transport and logistics hiring as trade flows pick up once more due to a reduction in tariff turmoil.

This suggests that those who thought the US economy would weaken will need to recalibrate their views, as a resilient US economy sets the stage for US stock market strength as we move through the second half of this year.