On the road to trade deals

Tariffs | What do trade deals mean for your portfolio?
Last week, the US announced new trade deals with the Philippines, Japan, and the EU (following previous deals with the UK, Indonesia and Vietnam, and a framework agreement with China). Markets reacted positively to the announcement of the trade deal with Japan, with Japanese equities rising by 4.11%. The US-EU trade deal announced over the weekend is expected to provide fresh momentum for markets, with European equities opening higher this morning. Overall, the market performance supported our broader portfolio performance last week, given our overweight positions in Japanese and European equities.

These deals with the US main trading partners are part of a broader effort by the US to finalise trade agreements ahead of the 1 August deadline. If deals are not reached by then, higher reciprocal tariffs could kick in. That said, given the US Administration’s eagerness to secure deals, we could see another deadline extension for countries still in negotiations. Overall, the improved clarity around international trade supports our decision to hold a moderately overweight allocation to equities.

Corporate earnings | A mixed bag so far 
Two of the so-called Magnificent 7 companies have reported results, but the market reaction has been mixed. Alphabet beat market expectations on revenues and earnings-per-share, reaffirming its commitment to invest in AI, which lifted technology stocks more broadly. (We remain structurally and thematically exposed to AI). On the other hand, Tesla missed market expectations on both revenues and earnings-per-share, capping off a tough start to the year as the company continues to struggle with rising competition and tariffs.

Four of the remaining five Magnificent 7 companies are due to report this week (Apple, Amazon, Microsoft and Meta), with Nvidia releasing results later in August. We anticipate the mixed results to continue with some beats but also some misses, as investments in the race to lead AI remain one of the focal points.

Interest rates | More cuts after the summer pause?
The European Central Bank (ECB) paused its rate-cutting cycle last week, keeping rates at 2% following seven consecutive rate cuts. With inflation hovering around the ECB’s 2% target, the central bank will likely wait to see how any US-EU trade deal affects prices. We expect one more rate cut before the end of year, bringing the deposit rate to 1.75%. That said, a trade deal agreement could reduce the likelihood of further cuts. Since markets have already priced this cut in, it is unlikely to affect the euro. In fact, we believe the euro could strengthen further, supported by increased spending and investment, from infrastructure, energy to defence, which could attract external capital flows. 

On the other side of the Atlantic, the US Federal Reserve (Fed) is widely anticipated to keep the Fed Funds Rate at 4.25-4.50% this week (Wednesday). Despite pressure from US President Trump, the Fed has remained steadfast in its data-dependant approach to rate changes. Strong employment data in June means an interest rate cut in July is likely off the table. That said, given the recent comments on monetary policy from the White House, markets are looking for signs of a possible cut in September. We still expect modest rate cuts in 2025 as growth slows due to higher prices brought on by tariffs. Unlike the ECB cuts, the Fed cuts are not fully priced in, which means any cuts could lead to further weakening of the US dollar.

Slower US growth has been a key theme of our investment strategy this year, and, as a result, a weaker US dollar. Therefore, we’ve recently reduced our exposure to the dollar in our portfolios throughout 2025. While US stocks have performed well in dollar terms, returns have been negative for European and UK investors when converted into euros and pounds. To manage this risk, we decided to hedge part of our exposure to US equities, thereby reducing the influence of USD fluctuations on performance.

This week | Trade deal hopes, Fed meeting & GDP growth data
This week, attention turns to the Fed’s interest rate decision and the advance estimate of GDP growth for second quarter (Wednesday). We expect the data to show that the US economy has avoided a technical recession after contracting during the first quarter. However, we would not read too much into a robust growth print. Growth data were distorted this year by businesses rushing imports during the first quarter ahead of tariffs, which hurt GDP figures as imports are subtracted from exports in the growth calculations. These effects may reverse in coming quarters. What matters is consumer spending, the main engine of growth in the US, which remains positive but on a path of moderation. The more important and recent US job market and ISM manufacturing survey data are expected to show positive but slower employment growth, a slight uptick in the unemployment rate from low levels, and, according to the key polls of forecasters, a moderate improvement in manufacturing activity.

In the Eurozone, second-quarter growth data are due as well (Wednesday). We expect modest growth, in line with the ECB’s outlook. Preliminary Eurozone inflation numbers for July (Friday), which are anticipated to be around 2%, will conclude the week, supporting the ECB’s most recent decision to pause rate cuts.

In Japan, we expect the Bank of Japan (BoJ) to hold interest rates steady (Thursday). The latest inflation data were mixed, but are still around 3%, so another rate hike in 2025 remains likely and is not entirely anticipated by markets. We think this could strengthen the yen, supporting our exposure to this currency.

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