EU-US Trade Deal: Initial Thoughts

The EU have agreed to purchase $750bln in US energy, up investments in the US by $600bln, and drop tariffs on imports from the US to 0%. In return, the US will levy a 15% tariff on imports from the bloc.

While such a levy remains sizeable, it is half the 30% tariff that had been threatened to go into place on Friday, and well below the 50% tariff threat that President Trump had made at the start of the month.

In terms of implications, the immediate one for financial markets is likely to be notable upside in the EUR, with FX trade to get underway in around 90 minutes, followed by a firming in risk appetite as equity futures begin to trade at 11pm London time. Stocks hardly need much of an excuse to rally right now, and agreement of the ‘biggest ever deal’ – Trump’s words, not mine – not only removes a key left tail risk that the market had been concerned about, but also yet again reiterates that the direction of travel remains away from punchy rhetoric, and towards trade deals done. Rumours that the US-China trade truce will be extended for a further 90 days will also help on this front.

From a sectoral perspective, European auto makers are one of the big winners here, with the 15% tariff also applying to auto imports into the States, a similar carve out to that achieved by Japan. Stellantis’ weak figures last week pointed to the detrimental impact that tariffs have already begun to have, so easing of this risk is likely to spark notable upside in the sector. Other obvious winners include US defence names, given the EU’s purchase commitments on that front, as well as US energy stocks, bearing in mind the almost $1tln of spend coming their way.

From a broader, macro perspective, agreement of a deal will be music to the ears of Christine Lagarde, and her colleagues at the ECB. Having stressed that policy is in a ‘good place’ last week, removal of a huge chunk of trade risk will significantly reduce the need for further policy easing, and naturally result in a hawkish repricing of policy expectations. Downside will likely also be seen in EU Govvies tomorrow morning as a result.