- Asian, European and UK equity markets rise after EU and US agree tariff deal
- Silicon chip stocks among leading gainers in Europe
- Defence stocks lag as EU agrees to buy American equipment
- Bond markets still on alert for inflation
- Too early to identify what the real economic impact of tariffs may be
“Stock and bond markets are welcoming the deal agreed by European Commission President Ursula von der Leyen and America’s President Trump, largely in the view that the outcome could have been worse, the risk of an escalating trade war has been lowered and that the EU is better off than it was on 2 April, after the United States’ initial launch of baseline and reciprocal tariffs,” says AJ Bell investment director Russ Mould.
“However, the European Parliament still has to ratify the agreement, the EU is still worse off than it was on 1 April and defence stocks are in retreat, as Europe promises to buy more US materiel as part of the trade agreement.
“The pharmaceutical and silicon chip industries may be particularly pleased to welcome the accord struck in Scotland over the weekend, given how they tend to attract some of the most trenchant comment, and biggest tariff threats, from President Trump. European tech stocks are therefore leading the way in the wake of the deal, as Franco-Italian silicon chip maker and Dutch semiconductor production equipment (SPE) specialists ASML, BE Semiconductor and ASM International top the Stoxx Europe 600 leaderboard.
“The Stoxx Europe 600 is having another go at getting back to March’s, pre-tariff all-time high, but not everyone seems enthused by the deal, judging by the early falls in the shares of defence specialists such as Sweden’s Saab and France’s Thales.
Source: LSEG Refinitiv data
“Even though financial markets seem happy to embrace a deal as being better than no deal, there are still material uncertainties as to what even the new agreement could mean once it is implemented – assuming the European Parliament ratifies it – and that applies to both sides of the Atlantic.
“President Trump may continue to champion his tariff policy, as the number of trade deals start to grow, all of them with levies higher than they had been before his ‘Liberation Day’ policy blitz on 2 April. Financial markets also seem pleased, as the risk of a tit-for-tat round of tariffs has seemingly been averted, especially as China and the US have entered their third round of trade talks, this time in Stockholm, as negotiators seek to further reduce the levies imposed upon each other by Washington and Beijing.
“However, no-one yet knows what the ultimate fall-out of increased tariffs upon global trade and economic activity will be.
“Again, the risk of a full-blown, tariff-and-trade war that followed America’s passing of 1930’s Smoot-Hawley Tariff Act seems lower, and there is no sign yet of economies showing material signs of either inflation or a slowdown in economic activity.
“But it is still early days. US imports totalled $4.1 trillion in 2024, or a seventh of economic activity, a figure that has continued to grow since 2018’s initial round of Trump tariffs. The current average tariff imposed by the Trump administration is now estimated to be around 14%, up from the very low single-digit percentage figure that prevailed before 2 April. That average levy means over $500 billion in tariff income for America.
Source: FRED - St. Louis Federal Reserve database
“Such a windfall will be welcomed by a nation that is grappling with an all-time high in the federal deficit and a record peak in its annualised interest bill, a figure which, at more than $1 trillion, eclipses the US defence budget.
“But American consumers seem likely to foot at least a chunk of that bill, unless US companies and importers generously sacrifice their profit margins and swallow it all themselves.
“The US consumer price index (CPI) has already surged from 250 to 322 since President Trump first mooted the prospect of steel and aluminium tariffs in March 2018. He imposed those levies and more, and the Biden administration did nothing to remove them.
Source: FRED - St. Louis Federal Reserve database
“That equates to a cumulative increase in the US CPI index of 29%. The year-on-year rate looks relatively benign, although it is still above the US Federal Reserve’s 2% target and does not yet really include the full impact of tariffs, partly because they are still being imposed piecemeal and partly because American importers responded to the threat of additional costs and levies by aggressively stockpiling in the early stages of this year. This can be seen in how US imports and the trade deficit soared in late 2024 and early 2025, even if heavy imports of gold further distorted the figures.
Source: FRED - St. Louis Federal Reserve database
“These short-term eddies and whirls have yet to unwind, and a one-off jump in inflation due to tariffs seems likely at some stage. That will eventually drop out of the year-on-year comparison, but consumers will still feel the cumulative effect, as the overall CPI index shows, and it may be no coincidence that the US Conference Board Consumer Confidence indicator topped out in autumn 2018, just six months after Trump first talked about trade and tariff policies.
“The Conference Board survey has retreated to a score of 93, compared to 2018’s 137.9 peak. It has also fallen sharply since last November’s score of 113 recorded when Trump achieved his second victory in a Presidential election.
Source: LSEG Refinitiv data
“Americans are therefore already feeling some sort of squeeze, despite relatively low unemployment and a buoyant stock market, and seven years of tariffs are yet to stoke any major upturn in US manufacturing employment either. Covid-19 may not have helped here, but the total number of US manufacturing jobs is more or less unchanged at 12.8 million over the past seven years.
Source: FRED - St. Louis Federal Reserve database
“It is easy to see why stock markets seem so relaxed, when the headline macroeconomic numbers seem benign, corporate profits continue to meet or exceed expectations and central banks appear inclined to lower interest rates, albeit at a gentler pace than that anticipated at the start of the year.
“But bond markets are still on alert, thanks to the combination of growing government debts and the risk of inflation due to tariffs. Benchmark 10-year sovereign yields are sneaking higher in the US, UK and Germany to suggest that someone, somewhere remains nervous, and there remains the danger that yields reach a point whereby they represent a return that investors start to prefer sovereign bonds to the riskier, if more potentially lucrative, option of equities.”
Source: LSEG Refinitiv data
