Investment Viewpoint: spotlight remains firmly on trade negotiations

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Markets and macro insights with Bernard Swords, Chief Investment Officer

What impact did trade negotiations have on markets and sectors?

• Last week, the spotlight was firmly on trade negotiations. Over the weekend we had the agreement in principle between the US and the euro area. The US will impose a 15% tariff on most imports from the euro area. While that’s a step down from the previously threatened 30%, it’s still higher than the 10% rate many had hoped for in the middle of the year. Irrespective of the tariff rate, the fact that an agreement is in place has brought a welcome dose of clarity to investors, in particular for the euro area, given the tariff rate is the same as that for Japan. Markets are responding positively this morning.

• This follows last week’s agreement between the U.S. and Japanese exports will also face a 15%. That is lower than the threatened 24%, but higher than the 10% rate hoped for earlier this year. The reduction in uncertainty was enough to drive equity markets higher, with world equities rising by 1% over the week. Japan stood out as the strongest performer, climbing an impressive 5%, which isn’t surprising given its central role in the trade news.

• Sector-wise, the most tariff-sensitive areas saw the biggest gains. Consumer discretionary shares, especially those tied to the motor industry, led the charge. Materials also had a strong showing, and healthcare came in third— though its performance may be more about catching up after a weak period than any specific news. On the flip side, defensive sectors lagged, as is typical when markets are in risk-on mode. The IT sector, which has been running hot recently, took a slight step back—likely just a pause rather than a shift in trend.

• Fixed income markets also had a positive week, with euro area sovereign bonds leading the way. Interestingly, corporate bonds are still ahead for the month overall.

What does this mean for the future?

• Looking ahead, while the move toward formal trade agreements is clearly a positive for market sentiment, the higher-than-expected tariff levels could weigh slightly on growth forecasts for the second half of the year. Much will depend on how supply chains adapt and whether these tariffs are diluted over time. But it could be October before we get some clarity on this.

How did markets react to the latest ECB meeting?

• As widely expected, the European Central Bank (ECB) left interest rates unchanged last week, keeping the deposit rate at 2%. What caught the market’s attention, however, was the tone of President Lagarde’s post-meeting comments. She signalled that the ECB is now firmly in “wait-and-see” mode, describing policy as being in a “good place” and noting that inflation is moving closer to target. While she reiterated that future decisions will remain data-dependent, the market took this as a strong hint that rate cuts are unlikely in the near term — unless growth data weakens significantly while inflation remains under control. Yields drifted slightly higher on the back of this.

Services sector driving positive PMI data

• From a macro perspective, the only major data point was the euro area composite PMI, which came in stronger than expected at 51—comfortably in expansion territory. The rebound was driven entirely by the services sector, which rose to 51.2. Manufacturing, however, remains below the 50 mark, with the new orders sub-index showing signs of weakness. This could be a sign that earlier tariff pre-emptive demand is now washing out of the system. Across the Atlantic, the latest U.S. PMI data painted a mixed picture. The services sector surprised to the upside, hitting its highest level since January — a sign of continued resilience in consumer-facing industries. In contrast, manufacturing slipped, though it remained just above the 50 mark, indicating modest expansion.

The week ahead: what to watch out for

It’s going to be a busy week. The 1 August deadline for Tariff negotiations arrives. The data highlights from the USA will be the FOMC meeting (interest rate setting committee of the Federal Reserve) and the jobs report (Non-Farm Payrolls). We will also get second quarter GDP, the PCE inflation data (the Federal Reserve’s favoured measure) and the ISM Manufacturing. From the euro area we will get second quarter GDP and the inflation report. In China the official PMI’s are released.